Commercial Update 79: Resolving Shareholder Disputes – How Does It All Work?

This week, a quick overview on shareholder disputes and the possible options open to the parties.

When making decisions, shareholders vote on them and in most cases, a meeting of shareholders will then need a majority of votes in order to be passed.

There are, however, some decisions that do require a higher majority to pass, and the unprecedented rapid rise of living costs and the continuing effects of the financial and health related fatigue from the effects of Covid19, it is not surprising that more and more businesses are coming across issues and dilemmas on which the owners have different views on how to proceed.

We have come across scenarios where shareholders are either being (or feeling as though they are being) left out of meetings or not being kept properly informed in respect of company information that they are entitled to or are disagreeing over how the company is being run with shareholders taking the view that there has been a breach of fiduciary duties by one (or more) of the company directors.

The first place to check must be the articles of association, which govern many small and medium sized enterprises, as well as start-up companies. These usually state that board resolutions can only be passed either by a shareholder majority vote, or unanimous vote if agreed in writing. They also usually give the chairperson a casting vote where the directors are split 50/50.

The next place to look would be for a shareholders agreement (if one has been drawn up), these usually contain provisions detailing how the shareholders should act in certain circumstances.

If, however, it seems there is no practical resolution possible, the next step is to consider changing the ownership structure.

Beyond this, some litigious options available to resolve shareholder disputes are:

  1. Where a minority shareholder claims that the affairs of the company have been conducted in a manner which causes unfair prejudice to its interests, that shareholder may raise unfair prejudice proceedings against the majority shareholder under Sections 994 and 96 of the Companies Act 2006. In such actions, there are a range of remedies which a minority shareholder may seek from the Court, including having its shareholding purchased by the majority shareholder at market value (adjusted to take account of any impact of the wrongdoing by the majority shareholder).
  2. There are also actions that can be brought by a shareholder, or shareholders, on behalf of the company. An example of when such proceedings might be raised is where there is an alleged breach of fiduciary duties by one or more of the company directors. For this type of action, the court’s permission is required to allow a shareholder to step into the shoes of the Company and pursue an action.

However, in many cases, these actions usually end up with an agreed exit for one of the parties with the Court ending up looking at this option anyway, so the sensible step is to head off that cost by looking at the non-litigious options first. Direct negotiation between parties, or their legal advisers (or if this will not work, a mediation facilitated by a third party mediator), may help to bring the dispute to an end. Two possible non-litigious ways to resolve this would then be:

  1. The leaving shareholder agrees to sell their shares in the original company to another shareholder or a third party entity with the consent (if needed) of the remaining shareholders on agreed terms; or
  2. The company buys the shares of the shareholder who is ready to move on – this is allowable under the Companies Act 2006, but subject to restrictions and conditions that need to be strictly adhered to. One is where full payment is made on completion. While a payment plan won’t work here though, a buyback in tranches (several buybacks) however, would be an option.

Don’t forget the tax implications of the above and make sure that tax advice is sought and obtained.

In conclusion, there is little doubt that a carefully thought out shareholders agreement can help companies run smoothly with fewer delays caused by shareholder disputes and talking early and pragmatically through the options in the event of a shareholders dispute can save wasted time and costs in the longer run.

Regards to all


Roger Margand