Disputes between shareholders of a private company are commonplace, which is probably not that surprising when you consider that shareholders’ interests will diverge over time.
Although the nature of shareholder disputes varies from business to business, they arise for many reasons such as a difference of opinion over the direction of the company or how the business should be managed. Securing an appropriate way forward for those shareholders often requires subtlety and expertise.
In particular, the standard of governance varies from business to business. Some operate well with well-defined procedures, clear lines of authority for their directors and reliance on good quality legal advice. Others operate much more informally which is fine when things are going well but can present a problem when a dispute arises, or things start to go badly.
Some litigants apply for litigation funding to pay their legal costs because without it they would not be able to afford to pursue an action at all. But this is not the only situation in which litigants seek to use litigation funding.
Businesses no longer need to invest and risk their own capital to fund a legal claim. FISCUS is the funding package that we can offer clients to help manage the financial risk of litigation and move those costs off your balance sheet.
Find out more about litigation funding options available to you.
Two categories of dispute
Of course, there is a final category of businesses that are poorly run. These businesses often have unresolved longstanding issues that result in a disputes, or series of disputes, leaving shareholders with little option other than to take legal action to protect their interests.
Generally, shareholder disputes fall into two categories: when the majority shareholder is blocked by minority shareholders from implementing a particular course of action; or a minority shareholder being pressured by a majority to accept things they do not agree with. There are also particular difficulties for those companies where the shareholders have reached deadlock.
Each dispute between shareholders is unique in its own way, but the key questions remain the same for all companies;
- Is there a shareholders’ agreement in place?
- What rights are provided by the articles of association?
- What were the parties’ expectations or understandings at the time the company was established and/or shareholders became members of the company?
- What is the real root of the dispute, and what do the parties want to achieve?
We have considerable experience of a wide range of disputes, for example,
- where parties are being excluded from the management;
- where they disagree over how matters should be taken forward;
- where they feel a company is being run to the benefit of individual members of the company excluding them;
- where there has been a breakdown or deadlock between the parties so the company cannot operate; or
- where the parties wish to go their separate ways.
Ideally, a shareholder dispute should be managed without recourse to full litigation, not least as it can lead to considerable expense and disruption for the business. This is where our expertise is invaluable; we have an excellent track record of settling disputes to the satisfaction of both parties. However, if the case does lead to court, we will protect our client’s position vigorously.
Whether you are a majority or minority shareholder it is crucial to understand what you can and cannot do and what options the other shareholders may have to stop you doing what you wish.
Key issues a shareholder must consider are:
- Is your company a quasi-partnership? Quasi-partnership disputes are a unique form of shareholder dispute. If a company has been formed on the basis of mutual trust and confidence between individuals, and all individuals expect to participate in the business, you may have a quasi-partnership – please see our article on quasi-partnership disputes.
- Unfair prejudice. An unfair prejudice petition under the Companies Act is a mechanism for a disadvantaged minority to seek to resolve their dispute. Broadly, if a business is being conducted in a manner that is unfair and prejudicial to the interests of a minority shareholder, they can take steps to petition the Court to correct that conduct. Please see our article on unfair prejudice for more information.
- Winding-up a company – where a company reaches a complete deadlock a winding up on just and equitable grounds can often be appropriate. In addition to reaching a position of deadlock, another reason for winding up a company could be because it can no longer fulfil its original purpose, for example, if a company was established to exploit a particular opportunity and that opportunity no longer exists.
Successfully resolving shareholder disputes requires flexibility and an understanding of the dynamics driving it, such as the involvement of third parties or a change in company relationships over time, Finding a resolution to a dispute requires an a degree of creativity which must reflect the nature of the business.
The following recent examples of our work underline our experience in advising on shareholder disputes:
- Acting for minority shareholder in a multi-million pound turnover business. We successfully secured a satisfactory resolution for our client who maintained that they were being prevented from fully participating in the business despite believing that their involvement was both necessary and desirable for the benefit of the company. Other disputes had also arisen at the same time.
- Bringing a petition for unfair prejudice on behalf of a minority shareholder against a majority shareholder in a financial services business. We were able to address within very tight timescales to protect the underlying business whilst securing our client’s future interests.
- Advising a majority shareholder concerning a petition for winding-up and/or prejudice brought by a minority shareholder on the basis of that shareholder’s expectations concerning the company and their role within it.
- Advising members of a company in a deadlock situation to secure a way forward where parties had different interests relating to the future direction of the business and whether it should even continue to operate.
- Advising the directors and shareholders in a large educational establishment concerning a dispute in the underlying company regarding the scope of the business. This required us to deal with complex issues regarding valuation of that business due to particular issues in relation to realizing value within that sector.
We have advised shareholders on many different types of disputes across a range of sectors. As a result of this experience, we know that many of these disputes must be approached in a creative and sensitive manner, understanding the long term effects of rupturing longstanding relationships and breaching issues of trusts.
In the absence of a written shareholders’ agreement, the relationship between the shareholders of a company is governed ...Read article