Any kind of dispute can be very disruptive to the smooth running of your business and it’s not always easy to keep all of your shareholders happy, so it’s important to know what to do if you’re a company director and you find yourself facing a shareholder dispute. In this guide, our shareholder dispute solicitors discuss many of the key questions our director and shareholder disputes solicitors are often asked so that you’re well prepared on how to hopefully prevent and deal with a shareholder dispute within your company.
Jump to:
- What are shareholder disputes?
- How can shareholder disputes impact a business?
- What are the most common causes of shareholder disputes?
- How to avoid shareholder disputes
- What legal rights do shareholders have in a dispute?
- How do you resolve a shareholder dispute?
- Dealing with deadlock in a shareholder dispute
- Can a shareholder be forced to sell their shares?
- How long does it typically take to resolve a shareholder dispute?
- Summary
What are shareholder disputes?
A shareholder dispute is when individual shareholders become embroiled in conflict with each other due to a disagreement over something that’s connected with the company, or with the company’s director(s). This can come about for any number of reasons but could be because, for example, there’s a difference in opinion over how the business is being managed or how profits are being distributed. No company that has shareholders as part of its make up, regardless of whether it’s large or small, is immune from disputes of this nature.
How can shareholder disputes impact a business?
The serious impact shareholder disputes can have on a business shouldn’t be underestimated. They can result in deadlock when it comes to making important decisions; cause operational disruptions concerning the day-to-day running of the company; lead to financial loss, and they can also have a negative effect on the company’s reputation if the general public becomes aware of a dispute.
What are the most common causes of shareholder disputes?
Whilst there can be many causes of shareholder disputes, some are more common than others. Typically, our director and shareholder disputes solicitors deal with the following causes:
- Disagreements around how the company’s finances are being managed.
- Disputes centred on how the business is being run by its directors (including shareholder concerns about whether the company’s legal responsibilities and obligations are being properly met).
- Family members who are also shareholders falling out.
- Arguments about how dividends are being paid or the level of remuneration being paid to shareholders who have a management role in the business.
- Conflicts of interest in cases where one or more of the shareholders is/are involved in another business.
- Amendments being made to the articles of association without the required authority.
- Minority shareholders feeling as though their interests are being overlooked or inadequately considered.
- Shareholder deadlock (this might be in circumstances where two shareholders hold 50% of the shares each and are deadlocked in relation to a decision).
- Dilution of shareholding by the introduction of a new shareholder or the issue of new shares
How to avoid shareholder disputes
Actively putting measures in place to avoid – or at least minimise the risk of – shareholder disputes is a sensible and advisable strategy. Outlined below are some of the most effective steps you can take to avoid a shareholder dispute:
- Clearly set out steps for addressing a shareholder dispute in either the company’s articles of association or the shareholders’ agreement, so that everyone is aware that there’s a policy in place to be followed and knows what’s expected from all parties involved.
- Keep the channels of communication open between senior management and shareholders so that any discontent is discussed early. Arranging regular meetings can go a long way in facilitating this.
- Keep any financial reporting regular and transparent.
- Ensure that there are clear processes in place for the valuation of shares and their subsequent sale for situations where a shareholder wishes to leave the company.
What legal rights do shareholders have in a dispute?
There are various rights that shareholders have in a dispute which they’re able to exercise, depending on the circumstances at hand. These can consist of:
- Voting rights: Whether or not there’s a dispute happening within the company, shareholders have voting rights when it comes to important business-related decisions such as who can be appointed as a director and what significant changes can take place.
- The right to access key information: This can include minutes from board meetings, for example, or financial statements, accounts and records.
- The right to bring an unfair prejudice petition: If an individual shareholder believes that, as a director, you’ve conducted the company’s affairs in a way that unfairly contravenes their interests or reasonable expectations, then they can bring a claim before the court with unfair prejudice as its basis. Grounds for this might be, for example, if the shareholder is of the opinion that you’ve used company assets for your own benefit as opposed to the company’s as a whole, or if you’ve paid yourself a bonus but are refusing to pay shareholder dividends.
- The right to bring a derivative claim: If a shareholder or multiple shareholders has/have grounds to believe that you’ve acted unlawfully or breached your duties as a director, then they’re able to bring a derivative claim against you: this is a type of claim brought by a company, on its behalf and through its members, for wrongdoing.
- The right to bring a winding up petition before the court: This is a very serious and draconian course of action which, within the context of shareholder disputes, involves a shareholder petitioning (asking) the court to ‘wind up’ the business on just and equitable grounds. Whilst this isn’t a right that’s exclusive to the company’s shareholders alone, it’s one that’s available to them if they fulfil certain legal criteria, have an interest in winding the company up and is a possibility in cases where they believe that the company isn’t being managed properly, or there’s shareholder deadlock. Because the effect of a winding up petition is to effectively close the company down, the court will exercise its discretion extremely carefully before deciding if it’s the right thing to do.
How do you resolve a shareholder dispute?
As with most types of business disputes, there are a few ways in which a shareholder dispute can be resolved and the most appropriate method – or methods – will hinge entirely on the factors at play within the dispute, what’s written down in the contract and what’s happening inside the company itself. Usually, a resolution is reached by the parties engaging in one or more of the following processes:
- Negotiation: This is often the first course of action and is the most informal of all the potential resolution methods in this list. It involves all of the aggrieved parties having a discussion with a view to reaching a mutually agreeable solution.
- Mediation: This is, as dictated by many articles of association or shareholders’ agreements, often the first formal step prescribed to try and address a shareholder dispute. A neutral third-party mediator will facilitate the mediation, and it’s often highly successful in settling most types of commercial disputes.
- Court Action: Sometimes court action in the form of litigation turns out to be the only way of resolving a shareholder dispute, although it only ought to be considered as a last resort if other attempts at bringing harmony to the situation outside of court (for example, by way of negotiation or mediation) break down. This is because litigation can result in relations within the company becoming even more inflamed and fragmented, as well as it being a costly and long drawn-out process.
Dealing with deadlock in a shareholder dispute
When shareholders of a company can’t reach a majority or unanimous decision via a vote (the percentage requirements will depend on how the company is set up), this leads to a situation known as shareholder deadlock. The reasons a deadlock can arise within shareholder disputes are numerous and resolution may only potentially be found by way of changing the company’s ownership.
Can a shareholder be forced to sell their shares?
A shareholder cannot ordinarily be forced to sell their shares, but it’s important to look at what’s set out in the company’s shareholders’ agreement and articles of association as a starting point. This is because within these documents there may be defined circumstances that enable a business to force a shareholder to sell in the form of a compulsory transfer provision and/or a share buyback clause. Trigger events for these provisions could be shareholder bankruptcy, for example, or if a director who also holds shares is dismissed or retires (sometimes called a “bad or good leaver” provision)
How long does it typically take to resolve a shareholder dispute?
It’s impossible to pinpoint exactly how long it will take to resolve a shareholder dispute. This is because it depends firstly on the complexity of the dispute and secondly, what method or methods of resolution are attempted. If the situation is resolved via negotiation or mediation then it could be a maximum of a few months from beginning to end, but if litigation becomes necessary, it could take in the region of one or two years.
Summary
While shareholder disputes can be fairly commonplace, it’s possible to find a swift and amicable solution – especially if legal advice is sought as early as possible. The need to act quickly if there’s discontent amongst or arising from shareholders should not be underestimated; delays can result in additional costs, personal and professional stress and worsening relationships.
