Shareholder disputes are commonplace in private companies. After all, people rarely agree on all matters 100% of the time, especially when it comes to business. However, failing to resolve such conflicts quickly and effectively can have devastating consequences for all parties.
Let’s take a look at the most common reasons why shareholder disputes arise, the preventative measures you can put in place, and the best ways to resolve any disagreements that occur.
Common types of shareholder disputes
Discord between the members (shareholders) of a company can arise for any number of reasons. Whilst the root cause will vary from business to business, some of the most common examples of shareholder disputes include:
- Unfair prejudice by majority shareholders – i.e. running the company in a way that is detrimental to minority shareholders, including forcing or pressuring them to accept a particular course of action
- Minority shareholders blocking a course of action proposed by majority shareholders
- Breakdown in personal relationships
- Disagreement about the management or direction of the company
- Deadlock between 50:50 shareholders, preventing the company from operating
- Individuals being left out of meetings or decisions
- An individual member’s refusal to attend general meetings or vote on company resolutions
- Breaching the terms of a shareholders’ agreement
In companies where the shareholders are also directors, other circumstances can give rise to serious disagreements, such as:
- Breach of directors’ duties – e.g. negligence, wrongful trading, suspected fraud, conflicts of interest
- Failing to disclose relevant information to all shareholders
- Unfair distribution of profit
- Poor performance by one of the director-shareholders
- Refusing to approve share allotments or share transfers
- The terms of directors’ service agreements/contracts
Ideally, shareholder disputes should be discussed and resolved amicably during general meetings. Unfortunately, this doesn’t always happen, particularly in companies where no shareholders’ agreement exists.
Unsuitable articles of association can also be problematic in such situations. This is why it is important to ensure that the articles address the specific needs of your particular company.
You should also review the articles of association on a regular basis, updating the provisions where necessary, as the business develops.
Resolving disagreements between shareholders
Disagreements between shareholders are often unavoidable. This is not necessarily a bad thing – healthy debate is important, and company decisions should be based on careful consideration of all viewpoints and eventualities.
However, even trivial conflicts can become acrimonious and untenable if left unresolved. In the most serious of cases, a company can become deadlocked and unable to continue operating.
When shareholder disputes escalate to this stage, it can be catastrophic for the business and all parties involved.
To avoid reaching this point, it’s crucial to anticipate disagreements, ensuring that your company has appropriate measures in place to deal with any potential issues that may arise.
Let’s take a look at the options available to you.
1. Put preventative measures in place
Shareholder disputes are more common in companies that do not have a shareholders’ agreement in place. Therefore, the best way to anticipate and prevent most issues is to draw up a shareholders’ agreement immediately after forming a company.
A shareholders’ agreement is a legally binding contract between the members of a company. It sets out their rights and responsibilities, thus regulating how they behave, work together, and make decisions. It should also include clear rules and procedures for dealing with any conflicts that arise.
By entering into a shareholders’ agreement, every member’s role and expectations are made clear from the start. This safeguards everyone’s interests and greatly minimises the potential for future disagreement and conflict between shareholders.
To ensure that your shareholders’ agreement is properly drafted, we strongly recommend seeking expert help and advice from an experienced solicitor.
2. Consider professional mediation
If you are unable to resolve a dispute between shareholders, and there is no clear remedy within the articles or shareholders’ agreement, you should consider professional commercial mediation.
Commercial mediation, which is facilitated by a qualified and impartial third party, can be an effective way to find a mutually acceptable solution and bring a dispute to an end before it escalates further.
This course of action helps to minimise business disruption, salvage relationships between disagreeing members, and avoid the stress and high cost of litigation.
Commercial mediation has an exceptionally high success rate. According to the Centre for Effective Dispute Resolution (CEDR), an estimated 93% of mediation cases are resolved either on the day or shortly thereafter.
3. Buy out the disputing member’s shareholdings
If you cannot resolve the dispute through amicable negotiation or mediation, another option is for one disputing party to buy out the shareholdings of the other.
Depending on the provisions set out in the articles and shareholders’ agreement, this may require mutual agreement, or the company could force the transfer of shares.
Whilst neither party may wish to give up their shareholdings, it may be the best solution when a disagreement reaches a deadlock. This is often of greater benefit to all parties rather than going to court.
Alternatively, the company itself may be able to use its reserves to buy back the shares from the aggrieved member. The company would then cancel those shares, rather than transfer them to another member.
In these situations, you should seek professional advice and appoint an independent third party to value the shares. This will ensure the outgoing member receives a fair and reasonable offer for their shareholdings, and it will minimise the potential for future litigation.
4. Sell the whole company
Should none of the disputing shareholders be willing to transfer their shares, they could mutually agree to sell the whole company to a third party. This would provide a clean break for everyone and ensure that each shareholder enjoys the same outcome.
Selling a company can be a rather long, drawn-out, and costly option. However, it is usually cheaper than litigation, and would allow everyone to move on as quickly as possible with their share of the sale proceeds in the bank.
5. Take court action
Taking court action against another shareholder should be the absolute last resort. It is expensive, time consuming, and incredibly stressful for everyone.
Additionally, litigation will likely cause irreparable damage to the relationship and further harm to the business. However, this may be the only option left if all previous attempts at negotiation and mediation have failed.
Should you reach this point, you must seek professional legal advice immediately. Your solicitor can talk you through your options and rights before taking this step.
Whilst shareholder disputes are common and expected in most companies, even the most trivial of disagreements can quickly get out of hand. This is why it is so important to create a properly drafted shareholders’ agreement as soon as you set up a company.
By doing so, you are protecting everyone’s interests, ensuring that all members are aware of their rights and responsibilities, and setting out clear procedures for dealing with any shareholder disputes that may occur in the future.
Sometimes, however, you can find yourself in a situation where you are unable to resolve matters amicably. In such instances, you may have to consider professional mediation, buying out the aggrieved member’s shareholdings, selling the company, or going to court.
Whichever route you choose, reaching a positive outcome will require careful consideration and expertise. Therefore, we would urge you to consult a solicitor as soon as possible.
If you have any questions about this post or limited companies in general, please get in touch with our company formation team or leave a comment below.