Shareholder Disputes
Finding the right solutions for resolving shareholder disputes
Disagreements between a company's shareholders are commonplace.
They often involve issues relating to the company's management, the declaration of dividends, shareholder rights, attempts to force shareholders to sell their shares and the price to be paid for those shares, and the interpretation of a company's articles of association.
What is a shareholder dispute?
As a general rule, shareholder disputes fall into two categories. The first is when minority shareholders block the majority shareholders from implementing a particular course of action or when a majority pressures a minority shareholder to accept things they disagree with.
Request legal advice on a shareholder dispute
Types of shareholder disputes
Breaches of shareholder agreements
If there is a shareholder agreement in place, disputes can arise over its terms, such as obligations regarding share transfers and voting rights.
Disagreements over management and control of the company
Minority shareholders may disagree with the decisions of the majority shareholders, leading to disputes over control and strategic direction.
Mismanagement
Shareholders may argue that the company's affairs are not being managed as they should and that directors are not acting in the company's best interests. This can lead to claims of breach of fiduciary duty or unfair prejudice.
Dividends and profit distribution
Shareholders may dispute the way dividends are declared or profits are distributed, especially if certain shareholders believe they are being unfairly excluded.
Share buybacks or transfers
Shareholders may argue that buyback procedures are being invoked in circumstances where they should not be or that the price proposed or paid does not reflect the value of the share shares, particularly where the mechanism as to how the price should be calculated is unclear or open to interpretation.
Legal remedies for disputes between shareholders
Derivative actions
If a shareholder believes that the directors of a company have mismanaged a company, for example, the directors have used company money for personal expenses, they may apply to the court pursuant to section 260 of the Companies Act to bring an action in the name of the company against the directors.
Unfair Prejudice - Section 994 of the Companies Act
A shareholder may petition the court on the basis that the company's affairs are being conducted in a way that is unfairly prejudicial to their interests. The court has a wide discretion as to the remedies that it may order. Most commonly, the court orders the buyout of shares. This may be a fair value, with no discount for the fact that the shareholding being bought is a minority shareholding.
Just and equitable winding up
Under Section 122(1)(g) of the Insolvency Act 1986, shareholders can apply to the court for the winding-up of the company on the grounds that it is just and equitable. This can be used where there is a deadlock or irreconcilable disagreement between shareholders.
Injunctions and specific performance
Shareholders may seek an injunction to prevent a specific action, for example, a vote or the transfer of shares. Alternatively, they may seek an order for something to be done, for example, the specific performance to enforce a particular contractual obligation such as an Article in the Articles of Association or the term of a shareholder agreement.
Dispute Resolution
Mediation and Arbitration
Shareholder agreements may contain dispute resolution clauses requiring shareholders to resolve disputes through mediation or arbitration. These mechanisms can keep the dispute private, be faster, and sometimes more cost-effective than court proceedings.
Expert determination
The parties may agree to submit to the decision of an expert third party. For example, they may agree to be bound by the decision of an independent third-party lawyer where there is a dispute as to the interpretation of a term in a Shareholder Agreement or to the decision of an accountant who specialises in share valuation where there is a dispute as to the price that shares should be bought/sold at.
Court proceedings
If the parties are unable to agree on a way forward, a court will resolve the dispute. A judge will resolve disputes of fact and law. Litigation can be costly and sometimes lengthy, but on occasion, it is necessary to enforce a shareholder's rights or obligations.
Legal framework for shareholders
Shareholders' rights vary depending on the type or class of shares and the percentage of the business they own. However, there are legal frameworks for shareholders outlined below.
Companies Act 2006
Companies must comply with the Companies Act, which confers certain rights upon shareholders and obligations on officers of companies.
Articles of Association
The Articles set out the terms upon which shareholders agree to be members of a company. They set our rights and obligations. They are the "rules of the game" and set out how the company's affairs should be conducted. For example, they set out the requirements for the appointment of directors, the calling of shareholder meetings, voting rights and the transfer, and how shares should be valued.
Where Articles have not been updated, they may be based on model Articles from earlier legislation, such as the Companies Act 1948.
Shareholder agreements
Shareholders may also enter into a shareholder agreement that sets out their rights and obligations and may include mechanisms for dispute resolution. A well-drafted shareholder agreement can help resolve shareholder disputes.
Things to consider to avoid shareholder disputes
Articles and shareholder agreements should be drafted carefully to include clear provisions on dispute resolution, including mechanisms for resolving disagreements over share transfers, management, and exit strategies.
For example, where there are equal shareholders or a small number of shareholders, it may be helpful to have deadlock provisions in place to deal with situations where the parties are unable to agree and provide a buyout mechanism or third-party determination.
Exit strategies for shareholders (such as a right of pre-emption or a put/call option) can help avoid or reduce the scope of disputes, particularly in the event of a relationship breakdown.
At the outset of business ventures, shareholders often do not want to think about what will happen if things go wrong between them, but it happens frequently, especially in family businesses. Investment in bespoke articles of association and a well-drafted shareholder agreement can be a good investment in the future.
Disputes can be costly and time-consuming. They can be an enormous distraction from the business. Clear agreements can help minimise disputes if they cannot be resolved.
Why choose us as your shareholder dispute solicitors
It is important to seek advice at the outset of a business and review and update documents regularly. What worked on day 1 of your business may not be appropriate five years down the line. Also, seek early advice if a dispute looks likely.
We have a personable and dedicated team of specialist shareholder dispute lawyers who regularly advise on all manner of business disputes. We have genuine expertise and experience in this area.
There is never a one-size-fits-all solution: we offer tailored advice to meet your specific requirements and are always on hand to guide and support you. We engage with other teams where necessary in order to give you the best possible advice.
