Company Shareholder Disputes

The overwhelming majority of limited companies registered in England and Wales are small to medium enterprises. These companies are likely to be owned and operated by a small group of individuals.

From time to time disputes can arise between individuals. The source of disagreement may be varied, but can have a serious impact on the ability of a business to continue to function effectively. Such disputes can be damaging to the business and to the individuals involved.

We at Berry Smith LLP have wide experience in advising parties involved in shareholder disputes to help them find a solution.

How do shareholders disputes arise?

When dealing with a limited company, it is important to remember that the company is a legal entity of its own. It is quite separate to and distinct from its directors and shareholders.

Most company disputes arise where there is a dispute between individuals. Although the roles of director and shareholder are different, it is common for directors in SMEs to also be shareholders. Disputes arise for all sorts of reasons, but the way in which they can be resolved will often depend upon the balance of power between shareholders.

Although the day-to-day running of a company is the responsibility of the directors, ultimate power often rests with the shareholders because they have the power to remove directors. That being said, the relative powers of directors and shareholders are subject to the Articles of Association of the company and any shareholders’ agreement which may exist. These documents are crucial when it comes to dealing with any disputes and need to be considered at an early stage. They provide the set of rules that will apply and may provide a route to a solution.

What is a minority shareholding claim?

One of the most common types of dispute in relation to limited companies is where one shareholder (i.e. a minority shareholder) claims that his or her interests are being unfairly prejudiced by the actions of others within the company (i.e. the majority).

Under section 994 of the Companies Act 2006 a shareholder can present a petition to the court for relief on the grounds that the company’s affairs are being or have been conducted in a manner that causes unfair prejudice to the interests of the members generally or some part of them, including themselves.

Someone presenting a petition there needs to establish that the conduct of the company’s affairs has prejudiced unfrilly the petitioner’s interests as a member of the company. In other words the conduct must be both prejudicial and unfairly so – both elements need to be established.

What is deadlock in a company?

Deadlock can be reached when, for example, there are two 50% shareholders who disagree on a course of action for the company. In that case neither has the required power to insist on a course of action, and deadlock has arisen.
If there is no agreed way forward it can be possible to apply to the Court for an order winding up the company, or for the Court to consider an alternative solution.

What solutions can be reached?

Sometimes, disputes can be resolved amicably. In many cases, however, the solution is for one party to “buy out” the other for fair value.

Where the parties can agree that a buyout should take place, that is a significant step forwards. However, the issue of what the shares to be sold are worth (and how they are to be valued) is a critical one. There are various different ways of valuing shares and the correct methodology in any given case is as much a question for the lawyers to consider as it is for the accountant undertaking the actual exercise of valuing the shares.

How can shareholders disputes be resolved?

Minority shareholder disputes can be complicated and potentially expensive. It is critical when considered a shareholder dispute to consider the ultimate desired objective, and to consider the various methods that may be available to achieve that objective.

In some cases court proceedings are necessary, and these can ultimately procced to a final court hearing where a judge will decide the case. More often than not though, agreement is reached between the parties.

This can be arrived at by discussion between the parties, either directly or through representatives or by a more formal Alternative Dispute Resolution (ADR) or Negotiated Dispute Resolution (NDR) process. This often involves mediation, where the parties agree to appoint an independent person to help them reach an agreement.

We always consider the best methods of achieving a resolution with our clients from the outset to seek to achieve the required objectively as cost effectively and quickly as possible.

If agreement is reached at mediation then the parties can enter into a legally enforceable agreement, and execute required company documentation to put their agreement in action.