We understand that as a director keeping your company’s shareholders happy can sometimes prove difficult. Indeed, 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.
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Common causes of shareholder disputes
Some of the most common causes of shareholder disputes that our director and shareholder dispute solicitors regularly deal with are as follows:
- Disagreements centred on how the company is being managed by the directors including concerns regarding whether the company’s legal responsibilities and obligations are being adhered to.
- Disputes over the payment of dividends.
- Amending the articles of association without authority.
- Shareholder deadlock e.g. for example when two shareholders hold 50% of the shares each and are at a deadlock for decision making.
- Personal disputes, particularly when the shareholders are family members
- Minority shareholders feeling as though their interests are not being adequately considered.
- Conflicts of interest (if one of the company’s shareholders is involved in another business).
- Disputes over the proper management of the company’s finances.
Whilst the above list isn’t exhaustive, it serves to illustrate how shareholder disputes can arise in a whole host of situations, which can very quickly become inflamed. It is also important to note from the above list that whilst shareholders may dispute with one another, they may also bring a dispute against you as a director in respect of your conduct and/or management of the company.
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...
Our examples detailed above 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 encourage the shareholders of the company to plan for how a dispute between shareholders should be handled by setting this out in a shareholders’ agreement, or the directors can do this in the company’s articles of association. This is best practice because having policies in place in documents such as these in advance of any issues arising 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.
However, most articles of association or shareholders’ agreement typically fail to set out what will happen in the event that any mediation is unsuccessful. It is therefore important to review these documents and ensure they make adequate provision for such circumstances. 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 most important duty you have in your capacity as a director, along with ensuring adherence to the company’s relevant legal obligations. Behaving properly is 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. It is also a good idea to consider now (and before any disputes arise) whether or not you should take out Directors and Officers liability insurance to provide you with protection should any claim be brought against you as director personally.
- 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 shareholder dispute solicitor, 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 and for you as a director the consequences of making the wrong decision on behalf of the shareholders could lead to, for example, your removal as a director, a personal claim against you for misfeasance 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 from a shareholder dispute solicitor.
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 goes against 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 a very broad concept and wholly dependent on the facts. Examples of conduct by a director that could be considered to be unfairly prejudicial are as follows:
- Directors using company assets inappropriately and for their own benefit
- Issuing shares and diluting minority shareholders shareholding/value as a consequence
- Directors paying themselves bonuses but refusing to pay shareholder dividends
- Refusing shareholders access to documents which they are entitled to see (this is limited by statute but a shareholders agreement and articles of association can prescribe that the shareholders have greater access to company information)
A court would determine whether any such claim of unfair prejudice was founded, based upon the evidence available and each case will be decided by considering the facts of each case.
There are several shareholder remedies available to a shareholder which include asking the court to:
- Regulate the conduct of the company’s affairs (this could be by ordering a meeting; or could go as far as regulating future conduct for company business and amending; the company’s constitutional documents such as the articles of association;
- Require the company to perform or refrain from carrying out an act;
- Provide for the company to purchase shares from the unfairly prejudiced shareholder on terms as ordered by the court;
- Provide for you as director to purchase the shareholders shares; and
- Order that the company be wound up (as discussed in more detail below).
If a shareholder claim is brought against a fellow shareholder(s) the court may also order any of the above remedies or that the shareholder(s) purchase the other shareholder(s) shares.
What does it mean to present a winding up petition on just and equitable grounds?
In the context of shareholder disputes, if a shareholder believes that the company is not being managed properly or there’s a shareholder deadlock, they can ask (petition) the court to wind up the business on just and equitable grounds. This is done by presenting a formal legal document known as a ‘winding up petition’ to the court. The relevant law in relation to this process can be found in the Insolvency Act 1986 and the Companies Act 2006.
The company’s directors can present a petition, as can any shareholder (both majority and minority) or anyone else who might be liable to contribute to the company’s assets if it’s made insolvent. A shareholder must fulfil one of the below criteria to be a petitioner:
- Be the only shareholder of the company
- Be an original shareholder of the company
- Be a registered shareholder of the company for a minimum of six of the 18 months before the petition is presented
Additionally, the petitioner must have an interest in winding the company up.
The court will then decide whether it’s appropriate to wind the company up (effectively closing it down), taking into account the interests of all the shareholders. It’s a decision that’s made at the court’s discretion and because winding a company up usually has serious consequences, the court will often try to find another remedy that’s less draconian.
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.
