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Shareholder Disputes (and how to resolve them)

Shareholder disputes are dangerous, and can easily turn successful businesses into struggling ones almost overnight.

While some people think such disputes are limited to large corporate organisations, most shareholder disputes are between partners and co-owners in small companies. They usually involve friends and/or family members, which can also make the situation emotionally charged.

We have extensive experience of managing and resolving shareholder disputes, and some of the classic characteristics that instigate disputes between directors, partners or co-owners include:

  • Belief that one of the partners is not doing their job, e.g. spending less time in work or too much time on holiday
  • The quality of work has declined, often when the individual is close to leaving the business whether retiring or moving elsewhere
  • Partners cannot agree on key operational decisions and have reached deadlock
  • One of the partners want to sell the business and retire but the others want to keep it running
  • The partners have vastly different objectives, e.g. one wants to grow the business while another just want to just maintain it at current levels.
  • There is a potential conflict of interest, e.g. when one of the partners, directors or co-owners has a stake in a competing company
  • The business has been saddled with someone the partners don’t want to work with. This can happen when one of your partners die and they leave their shares to their spouse or another family member

Disputes can also occur with minority shareholders who don’t play an active role in the company, for example:

  • They believe there has been a breach of shareholder agreements or the articles of association
  • They feel that unfair prejudice has occurred, e.g. the directors over compensate themselves or they keep too much money in the business so there is little left to pay a dividend.

The quicker you can catch and deal with these indicators the better.  The worst approach is to ignore them and hope they will go away or resolve themselves.  In our experience, they just get worse and what could have been handled with a conversation at an early stage can quickly turn into expensive and time consuming litigation.

If you need any advice or support in relation to a shareholder dispute or potential dispute, then please contact Andy Rudkin, Head of Dispute Resolution at Else Solicitors on 01283 526239 or at andy.rudkin@elselaw.co.uk.  You can rest assured that, as winners of the Legal 500 Regional Firm of the Year for Dispute Resolution, you will get the very highest level of service and expertise.

Below is an example of a straightforward partnership dispute, and how it might be resolved.

A Shareholder Dispute Between Two Partners

This is the most common type of shareholder dispute. Let’s take the simple example of two brothers, Bill and Ted, who set up their own business together. They each own half of the shares and their business has become reasonably successful.  Bill wants to continue aggressively growing their company, however Ted is happy to keep on doing what he is doing and taking a regular pay cheque.

Ultimately, Bill becomes frustrated and decides to leave to start up his own business.  Unfortunately, they do not have a shareholder’s agreement in place and the Articles of Association is a very basic (and inadequate) contract they downloaded from a website.

Bill feels he is being forced out by Ted’s unwillingness to continue growing the company.  Bill is happy to sell his shares for £500,000 but Ted only has £200,000 in available cash.

What can they do to resolve their situation?  There are numerous options, e.g.

  1. Bill keeps his stake in the business: In the first instance, it may be possible for a mediator to help them find a mutually agreeable solution. Alternatively, Bill can take a step back and become a sleeping partner while he sets up his own business or he could keep his stake in the company through a different class of shares- i.e. he has no voting rights or dividends but would still benefit from the sale of the business.
  2. Bill leaves the business: there may be a way for Ted to bridge the £300k to pay for his brother’s shares. There are various approaches to this, such as an “anti-embarrassment clause” which adjusts the price of the shares if Ted sells them within a specified period of buying them from Bill. We strongly recommend that you take legal advice to explore all avenues available to help one party buy out the other.
  3. Ted brings new shareholders into the company to buy Bill’s shares: this could be managers in the business, other family members or an external third party.
  4. The business buys back Bill’s shares: this is a possibility provided the company’s Articles of Association do not prohibit it and it won’t financially cripple the company. This solution may involve selling some of the company’s assets which has various legal implications.
  5. Ted applies pressure on Bill to sell: for example, Bill resigns as director and Ted increases his salary and awards himself a bonus for taking on Bill’s work. This can lead to a case of unfair prejudice if done incorrectly.
  6. Unfair prejudice: if one of them can prove unfair prejudicial conduct, e.g. Ted awarding himself excessive financial benefits or Bill driving clients away from the partnership and into this new business, then they can take the other to Court.
  7. Compulsory winding-up order: if Bill and Ted are deadlocked then one of them can petition the Court for a winding-up order on the grounds that it would be just and equitable to do so. This may be Bill’s preferred action if he is setting up a rival company.  There are various things which would prevent this such as the Articles of Association demanding agreement for this to occur.  The Court may also dismiss the petition if other options are open to the petitioner or it looks like he would gain unfairly- i.e. pick up all the old clients for his new business.
  8. Pre-Pack Sale: Ted puts the company into administration and sells it to his newly incorporated company. This has various legal implications and it may not be possible if the company is solvent.
  9. Leave Bill with shares in a shell company: Ted may be able to sell the company’s assets and so leave Bill holding shares in an empty shell company. This has various legal ramifications.

The first 4 solutions listed above are preferred as they involve consent. You should only consider the remaining options if these are not workable.  It is worth noting that threatening to do one of these later options may make the other partner more amenable to one of the first four solutions.

In any case, it is important that the brothers sort out their company documentation so that this situation does not arise again either between them (if Bill stays) or with another shareholder.

This brief look at a simple dispute highlights the various options that come about when considering just two equal partners in a business.

If you feel there is a dispute between you and other shareholders, then it is important that you take legal advice to explore all the options available and ascertain which is the best one.  The best solution depends on a variety of factors including:

  • Existing legal documents, e.g. shareholder’s agreements, Articles of Association etc.,
  • Personalities involved and the state of the relationship between them
  • Money available to the parties involved
  • Financial situation and success of the business
  • Availability of potential new shareholders

Whatever the solution, the sooner you can find one, the better.  A dispute can quickly destroy a successful business leaving nothing for the shareholders to argue over.

If you need any advice or support in relation to a shareholder dispute or potential dispute, then please contact Andy Rudkin, Head of Dispute Resolution at Else Solicitors on 01283 526239 or at andy.rudkin@elselaw.co.uk.