It is not uncommon to see shareholder disputes arising during the course of a business. Several factors can be attributed to such disputes, the most common ones being underperformance by shareholders or who are no longer working towards best interests of the business, difference of opinion with management, conflicts of interest, dividend distribution, breach of service contract, or concerns over possible illegal or fraudulent activities.
In such cases, it is imperative to seek legal advice as soon as possible and formalise a strategy. We discuss below how to avoid and/or settle such disputes as and when they arise.
Shareholders Agreement and Articles of Association
It is important to have a shareholder’s agreement in place when setting up a business. A shareholder’s agreement defines how a company is to be run and what powers and limits on decision-making ability each shareholder will have. As a rule of thumb, shareholders agreement and articles of association govern the company and its shareholders. These documents normally include provisions and a procedure which should be followed when resolving such disputes. For example, a shareholder can be asked to sell their shares at a set valuation in certain circumstances and having their service contract terminated.
In the first instance, parties should try and negotiate a compromise as it is almost always quicker and cheaper to negotiate a solution rather than taking legal action.
At times, it may be possible to reach a solution which allows the aggrieved shareholder to stay with the company. Alternatively, the other shareholders may be able to buy out the aggrieved shareholder’s shares at an agreed price. It is often beneficial for parties to have their legal representatives in such negotiations who will ensure that an appropriate agreement is reached.
Formal Meeting of Shareholders
The Companies Act 2006 outlines that those holding at least 5% of a company’s voting shares can call for a general meeting of the shareholders. Normally, a simple majority vote is all it takes to reach a decision; however, the Companies Act requires that special resolutions are passed in certain instances which require votes from shareholders holding a majority of 75 per cent of voting shares. Such formal meetings can sometimes resolve disputes simply by voting power, or through candid face-to-face discussions.
Appointing non-executive Director
A non-executive director, chairman or board advisor who is not involved in the day-to-day running of the business is often seen as someone who is unbiased and as such can help resolve disputes between shareholders through various means e.g. mediation. They can offer their invaluable experience and a fresh perspective to such disputes.
Removal of a Director
The Companies Act 2006 lays down powers to remove a Director. Shareholders (with at least 5% of the company’s voting rights) at the general meeting can ask for a resolution to be passed to dismiss a director. Such resolution must be passed at the meeting by more than 50% of the votes cast. Minutes of such a meeting must be taken and kept at the company’s registered office address along with a copy of the resolution.
If a shareholder is also an employee, then one option is to consider terminating the employment under a settlement agreement. For example, in cases of employment disputes such as unfair dismissal, redundancy pay, discrimination, whistle blowing etc.
Mediation as a method of alternative dispute resolution can often be seen as an effective way to resolve such disputes when direct negotiations fail. The Courts, in any case, expect the parties to have first attempted mediation before filing for litigation. A mediator can be an independent lawyer or other professional who can to facilitate consensus in a confidential and unbiased environment giving an opportunity to both parties to consider a wider range of possible solutions while removing the risk, uncertainty and costs of litigation.
Buy-out by an eternal party or by one of the parties
An external buyer or an existing shareholder/s who are willing to buy the shares held by a disputing party can be a solution. The articles or shareholders agreement normally stipulate such buyouts therefore it is important to have an all comprehensive shareholders agreement in place at the outset.
Buy-out by company
In certain cases, company funds may be utilised to buy some, or all of the shares held by a party in dispute. There will often be provisions in a shareholder’s agreement or articles of association that provide for and facilitate share buy backs by the company in certain situations.
Selling the company
Yet another way to resolve the dispute is for all of the existing shareholders to align their interests by selling the company to another party, therefore allowing everyone to start afresh.
Should you require further information regarding the above, please get in touch with our commercial litigation solicitors on +44(0) 20 3318 5794 or via email at email@example.com.