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Shareholder Disputes – Common Issues & How to Resolve Them

Shareholder disputes arise when disagreements or conflicts emerge among shareholders, or between shareholders and the management of a company. These disputes can stem from a variety of issues, including breaches of shareholders’ agreements, allegations of unfair treatment, disagreements over company strategy, or concerns about the misuse of company funds. Given their potential to disrupt day to day business operations and decrease shareholder value, these disputes require careful navigation and resolution.

At their core, shareholder disputes often involve competing interests and differing interpretations of Shareholder Agreements and/or the Articles of Association of the company. They can occur in companies of all sizes, from small privately held businesses to large organisations.

Resolving these disputes often requires legal advice and an understanding of business dynamics. At AFG Law, our team deal with a wide range of matters regarding shareholders. Please get in touch today to find out how our shareholder dispute solicitors can assist.

 

The Importance of Shareholders’ Agreements

A successful Shareholders’ Agreement is often the most effective way of proactively preventing a dispute due to conflicts of interest. These agreements are best established in the initial stages of business creation, or when significant structural changes are due to be made to a company (such as changes in share structures/classes, or on the introduction of new significant shareholders). A well worded agreement will define the roles, rights, and obligations of each shareholder and types of share class, preventing misunderstandings about responsibilities and decision-making authority. A typical shareholder agreement should include:

Parties to the Agreement

  • The shareholders involved, identified by name, type and the number of shares they hold. This is essential to clearly define the obligations and rights of each shareholder and any significant changes in share ownership/structure are reflected in the annual Confirmation Statement filed on Companies House by any limited company.

Company Structure and Share Capital

  • A breakdown of the company’s share capital, including the number and type of shares (e.g. ordinary shares, preference shares), and the rights attached to each class of share. In the UK, specific rights related to dividends, voting, and liquidation preferences must be defined.

Voting Rights and Decision-Making

  • Provisions outlining how decisions will be made within the company, including voting rights, quorum requirements for general meetings, and the types of decisions requiring shareholder approval (e.g., changes in the company’s constitution, mergers, or significant asset sales).

Restrictions on Share Transfers

  • Rules and restrictions on the transfer of shares, including:-
  • Right of First Refusal (ROFR): Existing shareholders may be given the right to purchase shares before they can be sold to a third party individual or organisation;
  • Tag-Along and Drag-Along Rights: Tag-along rights allow minority shareholders to join in the sale of shares initiated by majority shareholders. Drag-along rights allow majority shareholders to force minority shareholders to sell their shares under certain conditions.

Board of Directors and Management

  • The process for appointing and removing Directors and the role of Shareholders in the decision-making process.
  • The agreement may also address whether there will be specific reserved matters that require shareholder approval.

Dividend Policy

  • A clear dividend distribution policy, including how and when dividends will be declared (for instance quarterly or annually, and timing each year), and whether shareholders will receive dividends based on share class or other criteria.

Dispute Resolution

  • Procedures for resolving disputes between shareholders. In the UK, this often includes a requirement for mediation or arbitration (and any nominated legal provider as first recourse) as the first step before resorting to litigation.

Exit Strategy

  • The provisions governing an exit from the business, such as through a sale, IPO, or the buyback of shares. These should include valuation mechanisms and procedures for handling the exit of a shareholder (e.g., due to death, bankruptcy, or retirement).
  • The agreement should specify whether a buy-sell clause is included, which outlines the process for a shareholder to sell their shares and how the price will be determined.

 

Avoidance of Shareholder Disputes is the Best Policy

A shareholder dispute can have significant impacts on both the company and its shareholders. Disagreements may cause delays in daily operations, especially if the dispute involves control over key management positions. This can damage the company’s ability to carry out its business strategy and day-to-day operations, and in turn harm profitability.

A prolonged shareholder dispute may also lead to a loss of investor confidence, a decline in market value (in the case of public companies), or difficulties in securing financing. Investors and lenders may become wary of getting involved in a company with internal conflict.

 

How can Shareholder Disputes be Resolved?

Resolving shareholder disputes requires a precise and often collaborative approach to ensure that the best interests of the company are preserved while addressing the concerns of the shareholders involved.

Start by reviewing the Shareholders’ Agreement (if one exists), as it typically outlines the methods for resolving disputes. This could include mandatory mediation or arbitration clauses.

The agreement may also contain a pre-agreed course of action for common issues, such as deadlock resolution clauses, buy-out provisions, which should be the first point of reference.

Alternative Dispute Resolution (ADR) methods are often used to resolve shareholder disputes before parties resort to Court measures. These methods typically reduce hostility between those involved and are more cost-effective.

Litigation should be considered a last resort due to its cost, time consumption, and the potential to damage business relationships. However, in some cases, it may be necessary, especially when:

  • There has been a breach of fiduciary duty;
  • A shareholder is seeking to enforce their rights under the Shareholders’ Agreement or company law.
  • The dispute cannot be resolved through negotiation, mediation, or arbitration.

Fiduciary duty may also become a point of debate between Shareholders and Directors, in which case it is a general rule that Directors do not automatically owe fiduciary duties to the Shareholders. Directors can still be held accountable for breaches of this duty; however, for a Shareholder to bring a derivative claim through legal action.

 

Without a Shareholders Agreement – How can Shareholders Prevent Potential Mistreatment?

Should a Shareholder’s Agreement not exist for the company involved, minority Shareholders can be left in a vulnerable position. Without a formal agreement in place, the position becomes governed by the Companies Act 2006. This piece of legislation provides corporate laws insisting on the government of a company in every aspect of its management and finances, including but not exhaustive of:

Section 561:

Gives existing shareholders the right of pre-emption;

Section 284:

Gives shareholders the right to vote on resolutions;

Section 303:

Gives shareholders the right to require directors to call a general meeting;

Section 310:

Gives shareholders the right to receive notice of general meetings, and;

Section 630:

Requires the consent of shareholders to vary the rights attached to a class of shares, unless the Articles of Association allow otherwise.

If a shareholder disagrees with treatment from other shareholders and feels this is a breach of rightful treatment, under Section 994 of the Companies Act 2006, they may be able to make an Unfair Prejudice Petition on the grounds that the affairs of the company are being conducted in a manner that is unfair.

 

How can AFG Law Assist with Shareholder Disputes?

Proactive measures to prevent a Shareholder dispute, are always better than having to deal with a dispute.  At AFG Law, we can assist with advising on the contents of Articles of Association and Shareholder Agreements to try and circumvent disputes before they arise, and we’re happy to answer any key questions you may have on the creation of such key company documentation.

In the event a Shareholder dispute does arise within your company, we understand that these can be stressful, particularly for management and how it can impact on the ability to run day-to-day operations.  AFG Law are here to assist and we are proud to offer a friendly, approachable and reputable service, combining reassurance with the utmost professionalism.

If you need to speak to a specialist dispute resolution solicitor who deals with Director and Shareholder dispute matters, for assistance in drafting effective agreements, or if you need legal representation to bring or defend a claim in Court, please do not hesitate to get in touch.

Our team of commercial experts can be contacted by email on disputeresolution@afglaw.co.uk, or alternatively speak to one of our experts on 01204 377600. to speak to a member of our Dispute Resolution team over the phone.

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