Unfortunately, business relationships do not always go as planned, and events can frequently result in the relationship’s complete breakdown. Shareholders may be unhappy for a variety of reasons. They may, for instance, have concerns about the company’s management and believe they are being discriminated against. In many family-owned or owner-managed businesses, a deadlock situation is not uncommon, and disputes are all too prevalent in the absence of a clear shareholders’ agreement.
These types of disputes can have detrimental effects on a company and, if left unresolved, could result in the court dissolving the business. These disputes must be resolved efficiently and expeditiously. In this article, Shareholder Disputes UK, we consider the process and mechanism involved.
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For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of shareholders’ agreements and dispute resolution. Once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
What rights do shareholders have?
While they are not directly involved in the company’s operations, shareholders still possess privileges in and around the business. These include:
- Influence over management. By determining who sits on the board of directors, they have the authority to influence who is appointed to management positions.
- Voting privileges at an organisation’s annual or general assembly
- The ability to vote on any substantial changes prior to their implementation. Perhaps the most important right of a shareholder, this provides them with additional influence over how a company is managed.
- The legal right to seek redress for wrongdoing. When a shareholder believes their rights have been violated or there has been a breach of the shareholder agreement, they have the legal right to file a lawsuit against the company.
Why do disputes typically arise?
Disputes with shareholders can arise for a variety of reasons, including the following:
- Disagreement over the company’s direction
- Unhealthy interpersonal relations
- Competing interests
- Poor business performance
- Insufficient individual performance
- Insufficient capital reaching shareholders
- Conditions of a director’s service agreement
- The concern that the board is not carrying out its duties
Shareholder dispute resolution
Ideally, shareholder disputes should be addressed during shareholder meetings. However, if concerns are not adequately addressed at these meetings, it may be necessary to explore other options. Parties should consult (i) the company’s articles of association and (ii) the shareholders’ agreement (if one exists) to determine the shareholder options. Beyond this, some of the following alternatives are available to settle shareholder disputes including:
Unfair prejudice proceedings – Where a minority shareholder alleges that the company’s affairs have been conducted in a way that unfairly prejudices its interests, that shareholder may bring unfair prejudice proceedings against the majority shareholder under Sections 994 and 96 of the Companies Act 2006. In such actions, a minority shareholder may pursue a variety of remedies, including the purchase of its shares by the majority shareholder at market value (adjusted to account for the impact of the majority shareholder’s wrongdoing).
Derivative proceedings – These are actions filed on behalf of the company by a shareholder or shareholders. When there is an alleged infraction of fiduciary duties by one or more of the company’s directors, such proceedings may be brought. For this form of action, the court’s permission is required for a shareholder to pursue an action on behalf of the company.
Negotiation/Mediation – Shareholder disputes are similar to other disputes in that they can be resolved without the time and expense of court proceedings. It is possible to reach a resolution through direct negotiation between the parties or their legal counsel. Alternately, a mediation facilitated by a neutral third party may be an effective means of resolving the dispute.
Purchase of shares – If resolution of a dispute is not proceeding well, parties may wish to contemplate purchasing the disputing shareholder’s shareholding (subject to the terms of any shareholders’ agreement and the articles of association). It is probable that an independent third-party valuer will be required to conduct an evaluation of the shareholding.
The importance of a shareholders’ agreement
Each share in a limited liability company (whether public or private) typically carries one vote. If the owners of more than 50 per cent of the shares at a meeting agree on a motion, it is passed regardless of the other shareholders’ opinions. If a single shareholder owns more than 75 per cent of the company’s shares, they have absolute power and may veto all decisions made by other shareholders.
How can a minority shareholder be safeguarded from having its investment controlled by a majority shareholder, and how can decision-making authority be distributed more equitably among owners?
There are two options available in this circumstance: the use of distinct classes of shares or a shareholders’ agreement.
There are a variety of dispute resolution options available for shareholder agreements. By regulating the relationships between the company and its shareholders, professionally-drafted and implemented shareholders’ agreements can prevent partnership disputes. Additionally, shareholder agreements can aid in the resolution of any potential disputes. They can provide a precise description of the original agreement between the disputing parties.
Members of a limited liability partnership are also permitted to engage into contracts with one another. The agreements for limited liability partnerships are legally binding contracts that outline the responsibilities, rights, duties, and liability of each member, in addition to the administration and operation of the partnership. The 2000 Limited Liability Partnerships Act regulates the default provisions of limited liability member agreements.
How we can help
We have a proven track record of dealing with shareholder disputes. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
Please click here to find out more about our Commercial Litigation services.
How to contact our Commercial Litigation solicitors
It is important for you to be well informed about the issues and obstacles you are facing. Expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.
To speak to our Commercial Litigation solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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