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How to manage a dispute between shareholders

We understand that keeping your company’s shareholders happy can sometimes prove difficult, and the importance and powers afforded to shareholders under the Companies Act 2006 should not be underestimated. This guide will address some of the key points that you need to consider in order to effectively manage any disputes between shareholders, and provide guidance as to suggested mechanisms you can put in place to handle existing and future challenges.

The importance of anticipating shareholder disputes

No matter whether your business has just a few or many shareholders, it’s important to remember that dealing with different personalities will inevitably lead to disagreements from time to time. Some examples of potential disputes in this area include conflicts of interest (if one of your shareholders is involved in another business), concerns regarding whether your company’s legal responsibilities and obligations are being adhered to, proper management of the company’s finances and also issues connected with the performance of individual shareholders in carrying out their duties.

The above examples demonstrate why you need to be prepared to act if things become more serious or appear as though they have the potential to escalate, and why it is crucial to develop coherent strategies for effective shareholder dispute management as early as possible.

What measures should you put in place in anticipation of disputes?

Ideally, you should plan for how a dispute between shareholders should be handled by setting this out in a shareholders’ agreement, or in your company’s articles of association. This is best practice because having policies in place in documents such as these will inevitably reduce or potentially eliminate any confusion or challenge about how problems ought to be handled.

A note on mediation

Generally, articles of association or shareholders’ agreements usually contain a provision setting out that mediation should be the first port of call when a dispute arises. Mediation is an excellent alternative dispute resolution mechanism, ideal for taking the heat out of a situation by involving an appropriately qualified individual, who will be a completely neutral party to the issue that your company is experiencing.

It also is worth bearing in mind that your articles of association or shareholders’ agreement should also set out what will happen in the event that any mediation is unsuccessful. An example of this would be ensuring there is a process dealing with the practicalities of the shareholders parting company, should this become necessary.

Resolving shareholder disputes with the right legal support in place

It is strongly recommended that you take legal advice as soon as you become aware that a potential issue is brewing with your company’s shareholders, as the law in this field is technically complex and substantive. As a general guide, below are the factors that you need to consider, ideally prior to any disputes arising.

  • Check who is in control of the board

    Another reason why it is advisable to have documentation such as a shareholders’ agreement in place is so that it is transparent as to who has overall control of the board. If you are a director of the company, then you will no doubt be aware that you and any fellow directors are responsible for most of the decision-making. You will also be aware that the majority vote at a board meeting is generally the deciding vote. However, not all companies adhere to this traditional model and as a result, the shareholders may hold more power in decision-making processes than you realise. Familiarity with exactly what provisions apply in these circumstances is therefore crucial.
  • Examine and evaluate your own actions as a director

    Acting with the best interests of your company at heart is the overarching duty you have in your capacity as a director, along with ensuring adherence to the company’s relevant legal obligations. Behaving properly is consequently vital, as any breach of these duties could lead to serious personal consequences in the form of financial losses and even imprisonment in some cases.

    Some examples of conduct which would be construed as acting in breach of your duties as a director – depending on your capacity – would be failing to maintain proper accounting records or non-adherence to the company’s articles of association.
  • Check whether you have control over shareholders’ meetings

    It would be a mistake to assume that as a director with overall control of the board that you automatically have control over shareholders’ meetings – if you are in any way unclear, then again, it is advisable to check the relevant documentation and seek advice from a legal professional, who will be able to consider your company’s structure in conjunction with the parameters of the Companies Act 2006. The key thing to be aware of here is that different shareholders’ decisions involve different majorities, depending on the nature of the decision being made.

Is there anything else to consider when a dispute arises?

There are other significant matters to consider when a dispute involving your company’s shareholders arises. Primarily, the consequences of making the wrong decision by them in terms of the recourse they may have against you – for example, your removal as a director, or a derivative claim (a claim brought by a company, on its behalf and through its members, for wrongdoing by a company’s director(s) or by a third party). If you are faced with such action, do not hesitate in seeking specialist assistance.

What does it mean if a shareholder accuses you of ‘unfairly prejudicing’ them?

A complaint of unfair prejudice brought against you by a shareholder may be brought by an individual acting on their own behalf (as opposed to on the company’s behalf) in a situation where they believe you have conducted the company’s affairs in a manner which unfairly contradicts their interests or reasonable expectations. This may be because the individual shareholder is of the view that you are not running the company in such a way as they were led to believe at the outset of your relationship, which is evidently a very broad concept and wholly dependent on the facts.

A court would determine whether any such claim of unfair prejudice was founded, based upon the evidence available, and has a wide discretion in terms of the remedies it can order (for example, you may be ordered to sell your shares to the claimant shareholder or in the worst case scenario, the company may be ‘wound up’ if this relief is applied for in addition).

What about resolving matters outside of court?

In addition to the option of mediation, as referred to at the outset of this guide, it is worth considering whether negotiation may prove fruitful in a situation where you are faced with potential action by an aggrieved shareholder. An example of this would be making a reasonable offer for the shareholder’s shares to be bought back by the business at a fair price. Any attempt you make to engage in alternative dispute resolution in any form will more than likely be regarded favourably by the court, provided that it is a genuine attempt to resolve the situation without recourse to often costly and lengthy litigation.

If you are dealing with a dispute between your company’s shareholders, or an action brought by either a group of shareholders or an individual against you as a director, you need to act quickly in reviewing key company documentation. You also need to consider your legal obligations and look into methods of alternative dispute resolution, such as mediation and/or negotiation. The right support at the outset from a business dispute solicitor could save your company a significant amount of time, financial expense, and stress.


What next?

Get expert legal advice from our team of business dispute solicitors. Get in touch with us on 0800 689 1700, email us at enquiries@hjsolicitors.co.uk or fill out the short form below with your enquiry.

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