It’s usually the case that the more shares you have in a business, the more power and involvement you have in the running of the business and in other important decision-making in relation to it. Unsurprisingly, this can sometimes lead to friction between minority and majority shareholders with the former left feeling frustrated and aggrieved.
In this article, our business dispute solicitors discuss the common causes of disputes between minority and majority shareholders, steps that can be taken to prevent a dispute, possible ways to resolve a dispute if one does arise and also, whether there’s a time limit for bringing an action in such circumstances.
- How to prevent a minority shareholder dispute
- Common causes of disputes between minority and majority shareholders
- How to resolve a minority shareholder dispute
- Is there a time limit to making a claim?
How to prevent a minority shareholder dispute
Ideally there should be well thought out measures in place to prevent a minority shareholder dispute from arising. A well-drafted shareholder agreement, articles of association and directors’ service agreement can be worth their weight in gold when it comes to the effective management of a business and can prescribe how any potential problems ought to be dealt with before they escalate, as they often can in smaller and medium-sized businesses. Seeking support from a lawyer with experience in drafting documents of this nature is strongly recommended in order to safeguard against future issues, as is obtaining legal advice from a business dispute solicitor straightaway if you expect there will be a dispute.
Common causes of disputes between minority and majority shareholders
Common types of disputes between minority and majority shareholders include:
- Majority shareholder is attempting to force out the minority shareholder: This scenario can cause problems if the majority shareholder mistakenly believes that there is an automatic right to force a sale of the minority shareholder’s shares or to exclude the minority shareholder/director from management.
- Disagreement on the direction of the company: In a small or medium-sized business, it’s more likely that a difference of opinions will occur when it comes to the direction of the company, and this can leave minority shareholders feeling as though their views don’t matter. This isn’t so commonplace in larger companies because they generally have more checks and balances in place around the board of directors to ensure that they are following the defined strategy of the business; this in turn means that decisions on the direction of the company are made in line with that.
- Share dilution: It’s sometimes the case that wealthy majority shareholders fix artificially high subscription prices to effectively drown out minority shareholders from being able to subscribe to shares under any new share issue, leading to internal conflict.
- Withholding dividend payments: If there’s a suspicion that dividend payments to minority shareholders are being withheld without a justifiable or legitimate reason, tensions can quickly become inflamed. This can be deemed unfairly prejudicial and can lead to corresponding legal action.
- Earn-outs: In terms of who reaps the benefits of an earn-out, questions can arise when there are shareholders who are not involved in the daily running of the business – often minority shareholders – which can lead to tricky conversations and fallings out.
- Excessive directors pay: Where the company’s directors are awarding themselves seemingly excessive remuneration, minority shareholders can rightly believe that they must take steps to prevent this due to the direct impact it can have on the company as a whole, particularly when the remuneration clearly doesn’t reflect the directors’ skillsets or input into the business. Excessive director pay may also have been agreed in the absence of a general meeting in direct contravention of the company’s articles of association.
Do you need to resolve a business dispute?
How to resolve a minority shareholder dispute
If you are a minority shareholder and a dispute along the lines of one (or more) of the scenarios discussed above does arise, there are various ways in which to explore a resolution, as set out below:
Mediation is often considered when there is a problem between the shareholders and is, in fact, often prescribed as a mandatory means of dispute resolution in a company’s articles of association or shareholders’ agreement. It is generally a highly successful mechanism which involves a neutral, qualified third party assisting the parties in reaching a satisfactory solution for all involved. If a compromise cannot be reached via mediation, then again, the articles of association or shareholders’ agreement should outline what happens next.
Calling a general meeting
A general meeting can be called by a minority shareholder as long as they make up 5% of the voting rights of the company. This means that, in some instances, minority shareholders can call such a meeting without the backing of the company board, or indeed the other shareholders, to discuss concerns and bring up any grievances before further action needs to be contemplated.
Unfair prejudice petition
Bringing an unfair prejudice petition to the court is a right which arises under the Companies Act 2006 and is a type of claim that can be brought by a shareholder if they can demonstrate that a business is being run in a way which is unfairly prejudicial, for example, where dividend payments have been withheld.
Winding up petition
Because this is a serious course of action which could result in the compulsory liquidation of the company, it is strongly recommended that legal advice is sought before taking any steps to wind up a company. More information on this means of dispute resolution can be found in our detailed guide to shareholder remedies here.
Put simply, a derivative claim is a type of legal action that can potentially be brought by disgruntled minority shareholders on behalf of a company and in limited circumstances, without the input of the board of directors. We explore derivate claims and the procedure for them in more depth here.
Negotiating an exit
A further possible solution to consider if you are a minority shareholder facing a dispute is to check whether you’re able to sell your shares or purchase any remaining shares in reliance on a negotiated position in the shareholders’ agreement or articles of association. You will of course need to check these documents carefully and seek advice if necessary.
Is there a time limit to making a claim?
The nature of the course of action you decide to take as a minority shareholder will dictate whether there’s a time limit for bringing a claim, so it’s impossible to provide a blanket answer to this question given that it will turn upon the facts of your case. In relation to an unfair prejudice claim, for example, there is no limitation period – although the court can take into account any delay when applying its discretion to grant relief.
It’s crucial to be equipped with the right knowledge about your options if you become embroiled in a dispute as a minority shareholder. Consulting a specialist lawyer with expertise in shareholder disputes is recommended to minimise the expense and upheaval caused when things go wrong, and doing so can prove vital in helping you to find the right remedy to protect your business interests in a company.