Shareholders Disputes

Shareholders Disputes

Shareholders Disputes

Shareholder disputes arise where one or more of the shareholders of a company fall out.  For example, where there is a difference of opinion in terms of the way in which the company is being run.  Similarly, shareholder disputes can arise where the minority feel as though their interest within the company are being marginalised or they feel as though they are not being treated fairly in comparison to the majority.

As a result, shareholder disputes can have devastating effects on the operational affairs of the company.  For instance, they can result in the company being wound up. Therefore, it is worthwhile when starting-up a company, for the shareholders to set out in writing, the basis upon which the company has been formed.  As well as, the basis upon which it is agreed, that the company is to operate.  In addition, it is also ideal to include provision as to how any future shareholders disputes are to be dealt with and resolved.

What is a Shareholder?

Firstly, the shareholders are the beneficial owners of the company, and who share in the profits generated by the company.  Therefore, it is not surprising that shareholders disputes are quite common and arise for a number of reasons, which can include the following:-

  • there is a difference of opinion in the way the company is being managed or the direction the company is being taken,
  • there’s a disagreement in terms of the way dividends are being paid,
  • a breakdown in relations resulting in deadlock and the company is unable to function as a result,
  • there is a potential breach of a shareholders agreement.

Irrespective of the reason, the outcome could ultimately be very damaging to the business and poses a significant risk to the company’s stability.  Consequently, it is therefore imperative that the correct strategy is adopted to achieve the desired outcome as soon as possible.

What should I do if I am involved in a shareholders dispute?

Certainly it is the case, that there are many options available, when dealing with shareholders disputes.  Therefore, it very much depends upon the desired outcome and the ultimate end game.  However, generally the options available fall within two distinct avenues, either a negotiated settlement or litigation through the Court system.  Often a determining factor can be whether a shareholder’s agreement is in place. 

Most importantly shareholder’s agreements can include the method to be adopted when dealing with any dispute should one arise.  Therefore, it is often useful for shareholders of small private companies, to consider entering into a shareholder’s agreement from the outset.  Above all, in doing so, the shareholders can set out the basis upon which they agree to the company being run.  As such, if you don’t currently have a shareholders agreement, please get in touch our Virtual In-House Counsel services can help you obtain the requisite legal advice.

Shareholders Disputes - A Negotiated Settlement

Most importantly, when dealing with shareholder disputes, devising the overall strategy is essential.  For example, this will often involve some form of negotiation, whether that is from the outset or in conjunction with litigation.  As regards negotiating a settlement, this can take various forms, but some examples could include the following:-

  • an agreement whereby one party agrees to buy the others shares.  For example over a period of time or with some sort of payment proposal,
  • the company buys back its own shares with distributable funds available to it prior to dividends being distributed to the shareholders,
  • the company is effectively split up and each party takes a specific aspect of the business with the view to starting a new business and trading independently, otherwise known as a demerger.

Certainly, a negotiated settlement removes the risk of litigation and the possible uncertainties of proceeding through the Court process.  However, often it can be the case that negotiation alone is not viable or realistic and so litigation is necessary.  Although, with the view, if possible, to negotiate in conjunction with the litigation process.

Litigation

Likewise, there are various claims a shareholder can bring, which can include the following: –

  • The presentation of an unfair prejudice petition through the High Court pursuant to section 994 of the Companies Act 2006.  In short, an unfair prejudice petition entitles a minority shareholder to present a petition in circumstances whereby they have reason to believe that their interests in the company have been unfairly disadvantaged or prejudiced in favour of the majority. In addition, the Courts have a wide discretion to dispose of the claim.  However, more often than not, will result in the remaining shareholders purchasing the prejudiced shareholder’s shares.
  • A just and equitable winding up order, resulting in the company being wound up, in circumstances where there is a complete deadlock between the parties or it is otherwise sensible to wind the company up as opposed to any other viable option available.
  • A derivative claim, which can be brought by the shareholders of a company where there are concerns of wrongdoing.  For example, in circumstances whereby the company has insufficient authority to bring the claim itself.

Above all, if you have concerns in terms of the manner in which your interests in a company are being dealt with or you have concerns relating to an individual, then please get in touch.  Certainly, we can discuss with you, the steps that you wish to take and advise you of the options available to you.  

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