In recent months, we have seen an increase in shareholder disputes and given the current climate and difficulties many companies are facing, we expect to see more. Shareholder disputes can lead to significant disruptions for a company. They can affect not only the company’s business, but also their reputation and commercial interests, particularly if a deadlock situation is reached. There is also the consideration of costs for the individuals involved. Resolving the dispute quickly and effectively is imperative to avoid potentially catastrophic consequences, particularly in the current climate.
What is a shareholders’ agreement?
Ideally shareholders in a company should enter into a shareholders’ agreement. A shareholders’ agreement can include the rights and obligations of the shareholders and issues of transfer of shares. It also sets out how matters should be dealt with if an issue arises. Whilst the company’s articles of association is a public document, with written rules about running the company, a shareholders’ agreement is a private agreement and can extend to further areas.
A breach of a shareholders’ agreement is normally when shareholders’ actions have broken a term within the agreement. This results in a breach of contract claim based on express terms. An example of a breach is a share transfers that is not in accordance with the rules or it can be selling company assets without authorisation. If the breach causes loss to other shareholders, they may be entitled to damages. Damages usually involve compensation, but there are other remedies available such as getting a court injunction order or obtaining a court order for specific performance (to force a party to perform their contractual obligations).
What happens if there is a dispute but there is no shareholders’ agreement in place?
It is far more common for issues to arise when there is no shareholders’ agreement in place. In this scenario, it doesn’t mean that there are no remedies available to an aggrieved shareholder. However, they will need to consider what options are available to them in relation to the issues. For example, there may be a difference in opinion about the running and direction of the company, decisions about major assets and their treatment, or even about profits and how and when they are distributed.
Shareholders can be majority shareholders, or minority shareholders, and often, may also be an office holder of the company as a company director.
If a minority shareholder believes the company’s actions are unfairly affecting their interest, they may consider bringing an unfair prejudice petition against the offending shareholder or directors. The minority shareholder will need to show that the actions of the company have adversely affected them as a shareholder and that these actions are also both unfair and prejudicial.
If they are successful in their claim, the courts have a wide range of powers available to them. These include the ability to allow the minority shareholder to purchase majority shares or to stop the company from acting in the disputed manner.
Where a shareholder is also a director of the company, they will owe additional duties to the company and its shareholders (whilst the company is still solvent). These additional duties are outlined in S.171 – 177 Companies Act 2006, and include:
- To act within powers
- To promote the success of the company
- To exercise independent judgment
- To exercise reasonable care, skill and diligence.
- To avoid conflicts of interest.
If a director is in breach of any of their duties, there is potential to make a claim against the director. The minority shareholders will need to seek permission from the court in order to bring a derivative action. This is where a shareholder, as a representative of all shareholders, can bring proceedings on behalf of the company to remedy a wrongdoing of one or more directors.
Alternatively, the shareholders may wish to consider a presenting a winding up petition on the just and equitable ground under Section 122(1)(g) of the 1986 Act. These type of petitions can be brought where there is loss due to a deadlock situation, mismanagement by directors, or where the original purpose of the company can no longer be achieved.
Alternative dispute resolution
Whilst a shareholder may wish to consider an unfair prejudice petition, derivative action or a just and equitable winding up petition, these are not the only options. A more cost effective and quicker approach is to enter into a form of alternative dispute resolution. This allows for a solution to be reached outside of the normal claims that are available.
Our Dispute Resolution team has recently advised and assisted on a number of disputes between shareholders using an alternative dispute resolution. This allows for a commercial approach. In many scenarios it leads to the business being able to continue to trade, avoid reputational risk, and find a way to continue to achieve its commercial ambitions harmoniously.
If you are currently experiencing a shareholder disagreement or a breach of a shareholders’ agreement has occurred and would like further advice, please contact Robyn Adams in the Litigation & Dispute Resolution team on 01727 738226 or email firstname.lastname@example.org.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.