Want to know more about the sort of shareholder disputes you might come up against, and how to avoid and resolve these issues? Then don’t go anywhere…
Owning shares in a company can be a tricky business, especially if there are a number of individuals involved. With so many people owning a stake in company matters, getting into disagreements is part and parcel of the whole affair.
With shareholder disputes being so common, it’s important you know what to expect in these situations. So, to learn more about the common types of disputes with shareholders, how to spot the signs so as to avoid them, and when to seek the advice of a solicitor, read on…
What is a Shareholder Dispute?
Disputes between shareholders can arise for a number of different reasons. Usually, they start with a disagreement between minority shareholders, who have little say in the day-to-day running of the company, and majority shareholders. Disputes typically involve disagreements about the way the company is being run, a poor relationship between majority and minority shareholders, or a breach of directors’ duties.
What Are the Common Types of Shareholder Disputes?
There are many reasons why a dispute between shareholders may occur, but the following are some of the most common…
Breach of Articles of Association or Shareholders Agreement
The Articles of Association must be supplied when registering the company, and the shareholder agreement is a private document providing details about the running of the company. Both the articles of association and a shareholder agreement, lay out the rules and regulations for:
- The rights and obligations of the shareholders;
- Regulating the sale of shares;
- Emphasising the rules for how the company is going to be run, including how important decisions are to be made;
- And offering some protection to minority shareholders
If there has been a breach of either the Articles of Association or the Shareholder Agreement, this can quickly result in a dispute between shareholders.
Breach of Directors’ Duties
Directors will usually have control over the day to day running of the company, which involves making big financial decisions and entering into contracts. A director of a company owes certain duties to a company, as set out in the Companies Act 2006, which are;
- To act within powers
- To promote the success of the company
- To exercise independent judgement
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties
- To declare interest in proposed transaction or arrangement
A breach of any of these duties can result in a shareholder dispute.
Disagreements Over Company Direction
One of the most common causes of disputes among shareholders occurs when there is a disagreement over the management and overall direction of the company. If these disagreements can’t be resolved via the usual methods of communication, then it can result into official disputes.
Exclusion of Shareholders from Board Meetings
It’s important that all shareholders are informed of any board meetings being held, and that a full agenda is circulated ahead of time. Accurate minutes should be taken during all meetings and then circulated again after the meeting. Failure to make sure that all members of the board are given the opportunity to attend meetings, whether intentional or not, can cause friction and risk disputes.
Poor Relationships Between Majority and Minority Shareholders
Minority shareholders have fewer shares in the company, and also have little power to effect change within the company. This leaves them open to mistreatment by majority shareholders, who have more power. This often leads to disputes and claims against majority shareholders from minority shareholders.
All salaries to directors and members of the board should be fair and appropriate to their experience and industry. Any discrepancies in salaries for no reason is often met with conflict.
Dividend policies should also be fair to all shareholders. If it is found that the policy favours some shareholders over others, then this can be a source of disputes.
Failure to Disclose Financial Information
One of the main jobs the directors of a company has is to keep all the company’s shareholders informed about the company’s finances. For example, if the company is losing money in any way, this must be disclosed. Failure to communicate this information is very serious and will, understandably, cause disputes.
How to Spot the Signs of a Shareholder Dispute
Conflict between shareholders is definitely something to avoid. Luckily, it is possible to spot the signs of a dispute on the horizon, so you can deal with it before it becomes more serious. The following behaviours in shareholders may indicate a potential dispute brewing:
- Complaining of being excluded from meetings unlawfully
- Exhibiting disruptive behaviour in meetings
- Poor relationships with other shareholders
- Calling out other shareholders or directors for lack of performance
- Becoming a spokesperson for a group of shareholders
- Often vocally disagreeing with the direction of the company
- Requesting meetings to be rescheduled according to their schedule
- Using legal language when complaining about shareholders or their decisions
- Threatening to involve a solicitor
Shareholders and the Law
Sometimes, it is possible to remedy this situation through mediation or negotiation. That said, the law surrounding shareholder disputes is complex, so it’s important to understand the underlying legal concepts behind companies, directors and shareholders.
Technically, a company is a separate, distinct entity from its shareholders and directors. Therefore, a company may be sued, or may sue its shareholders or directors. It also means that in, certain cases, the proceeds of any claims brought by one shareholder against another belongs to the company.
The Articles of Association are technically a contract between the company and its shareholders, determining who in the company will act on its behalf.
Directors will usually be in charge of the day-to-day running of the company, making important decisions that are in everyone’s best interests. Depending on the type of company, directors’ rights may be restricted by the Articles of Association or shareholders agreement. For example, it may be that some decisions must require some sort of shareholder’s approval before directors are allowed to action them.
Ultimately, shareholders have the overriding power of the company over directors. Shareholders can dismiss directors and appoint new ones through a majority vote. This tends to only benefit majority shareholders, as minority shareholders are not granted as much power.
However, there are usually some protections in place, in the Articles of Association or shareholders agreement, for minority shareholders.
How to Resolve Common Shareholder Disputes
Disputes between shareholders are common, but that doesn’t mean that they will all result in court proceedings. So, some things you can do to prevent a shareholder dispute from becoming more serious include:
- Creating a shareholder agreement
- Making sure the Articles of Association are clear and properly drafted
- Ensuring directors are aware of their duties, and providing training where necessary
- Making sure all members of the board are aware of meetings, and that an agenda is circulated in good time
- Getting legal advice early on if you suspect a dispute
- Seeking mediation to resolve disagreements, using independent advisors
- Consider buying-out difficult shareholders
Things to do to Resolve Shareholder Disputes
It’s not always possible to avoid a dispute, but there are things you can do to reduce the risk of things getting out of hand and resulting in lengthy court battles. Some of our top tips for doing just that include:
Seeking a professional independent mediator, who has no interest in the company, can help you to negotiate any disputes. Mediation is generally quicker and easier than going to court, and has a high success rate for solving disputes.
2. Call a General Meeting
Sometimes, disputes can be resolved by calling all shareholders to a general meeting to discuss and vote on any issues. It’s important to make sure all board members attend the meeting, and that a comprehensive agenda is circulated detailing the issues and proposed resolutions to be discussed.
3. Remove a Director
If a director is the cause of disagreements, it may be possible to remove them from the board by calling a general meeting and casting a vote. Over 50 percent of votes must swing a certain way before removing the director. However, the director has a right to appeal, so seeking legal advice before attempting to dismiss them is smart.
4. Unfair Prejudice
One of the most common and powerful methods used by shareholders to resolve disputes, particularly minority shareholders, is to make a claim of Unfair Prejudice under the Companies Act 2006. This can be used if the claimant believes:
- That “the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members generally, or of some part of its members”;
- O, “that an actual or proposed act or omission of the company is or would be so prejudicial.”
It is up to the court to decide what is considered ‘unfair’, and each case will be uniquely scrutinised. Sometimes, just the threat of a petition of Unfair Prejudice is enough to start negotiations, and encourage an agreeable outcome.
5. Derivative Claims
Under the Companies Act, any shareholder can bring a claim against a director of the company who has breached their duties. These claims are technically brought on behalf of the company, hence the name ‘derivative claim’.
Making a claim is a two-step process, requiring permission from the court to continue past the first ‘permission’ stage. This is when most derivative claims fail, making it is a less desirable solution due to the involvement of the court.
6. Just and Equitable Winding Up
A shareholder may apply for the company to be wound up on “just and equitable grounds” under the Insolvency Act 1986. But, this method is considered an extreme last resort, where all other methods to find a solution have failed. A court will be unwilling to terminate a healthy company without justifiable reasons, so it can be difficult to get the court to agree.
7. Buying Out a Shareholder or Director
Arrangements can be made to buy the shares of a disputing shareholder or director, either buy an external party (although minority shares are not in high demand), another shareholder, or by the company itself. Using this method of ‘buying out’ another shareholder is encouraged by the courts to settle shareholder disputes, rather than taking official action.
8. Sale of the Company
Another way to resolve a shareholder dispute is to sell the company as a whole to another party, allowing everyone involved to walk away amicably and make a clean break. This can sometimes be used when shareholders reach a deadlock in negotiations.
Although this might mean shareholders will not be able to benefit in the company’s growth in the future, the proceeds from the sale of the company will allow them to quickly move on to their next business venture.
Resolving Shareholder Disputes Amicably
Disputes among shareholders, although not uncommon, can be upsetting and stressful for those involved. This is why recognising the signs of an impending dispute, and seeking legal advice before it escalates, is paramount.
Most of the time, mediation or a simple negotiation meeting can resolve these disagreements. However, occasionally you may need to pursue one of the solutions listed above. We hope this has provided you with the information and means to do just that!