How to protect your interests in a shareholder dispute
Shareholder disputes can arise for a variety of reasons but are often emotive and highly charged. They commonly arise when there are concerns about the direction of the business, the management of the company or in cases where the shareholders feel that their rights are not being respected by the board. Trust between shareholders (the owners) and directors (the managers) is absolutely crucial to the success of any business. In fact, internal company disputes are often more of a threat to the success of a business than disputes with third parties. Disputes between shareholders can be extremely costly, time-consuming and, potentially worst of all, highly destructive and damaging to the value of the company.
Know your company
As with any major company decision, research and knowledge will be your best weapon and your best defence. The first thing you should do is check your company’s articles of association and any shareholders’ agreements you may have signed. Disputes can sometimes be avoided if there are clearly drafted and agreed articles of association and a shareholders’ agreement for the company at the outset which pre-empt and set out clear procedures for dealing with any such disputes, either through mediation or through a mechanism to allow conflicting shareholders to part company. This will allow any negotiations to proceed more smoothly going forward, and you should consider all your options, including the value of the company and whether the sale or purchase of either of your (or other shareholders’) shares would be an acceptable – and achievable – outcome.
Know the law
It is very important to seek legal advice as early on in the process as possible so as to fully understand your rights and the strength of your position, and to alert you to issues and solutions that you may not have considered. If you are a minority shareholder (i.e. you own less than 50% of the issued share capital of the company), you have protection under the Companies Act 2006 against unfairly prejudicial conduct by the shareholding majority. Whilst it is difficult and expensive for a minority shareholder to take formal court action, the threat of such an application and skilful negotiation can deliver results. In any case, litigation should always be considered the last resort, not least because it can become time consuming and expensive if challenged.
Be reasonable
For any shareholder, going through a dispute with other shareholders is a difficult and demanding process which can be not unlike that of a divorce. The passions and heat generated by the dispute can obscure the commercial realities of the situation which can lead to the destruction of the business over which the dispute arose and result in everybody losing. In extreme circumstances, if the split is irreconcilable, there may be no choice but to wind up the company and distribute its assets which is rarely in the best interests of anyone involved. There is invariably a way, if all parties act reasonably and take a constructive approach to negotiations, in which to reach a resolution that is acceptable to all parties.
Ultimately the vast majority of shareholder disputes are resolved without the need for the company to be wound up or by going to court, for example through a company buyback of a shareholder’s shares or a sale of an outgoing shareholder’s shares to the existing shareholders. Ultimately, it is vital to take constructive and proactive legal advice early with a view to seeking a practical resolution to the dispute so as to stand the best chance of preserving the asset over which you are fighting: your company’s value.
There are 1300 sections in the Companies Act 2006 – normally there’s something in there we can use to help create a better platform for you to negotiate. We have a strong track record of finding creative solutions. Speak to us to see if we can help.