Disputes between shareholders can have devasting consequences for the value, management and stability of a company whether the business is a private company, family enterprise or larger organisation. However, with the right legal support these threats can be removed entirely.
At Nath Solicitors, we are incredibly aware of the various challenges that arise from complex shareholder conflicts. Through our bespoke, strategic, and assertive approach we have resolved multiple shareholder disputes while preserving the commercial value of the business. Here we look at the main causes of disputes between shareholders, companies and others, we outline the approach we take to this kind of case, and we highlight the legal remedies available.
What are the Leading Causes of Shareholder Disputes?
1. Breach of Shareholders’ Agreement or Articles of Association
Disputes can arise when shareholders block business decisions, violate agreed procedures as outlined in any shareholder agreement or exceed their powers.
2. Deadlock
Structures with equal ownership stakes can lead to deadlock, especially in the absence of a mechanism for breaking tied votes or resolving disputes
3. Unfair Prejudice
One or more shareholders may allege that their rights to have been unjustly overlooked. This may be through:
- Improperly diluting the shares
- Misusing company funds
- Being excluded from decision-making
- Changing the company structure to exclude minority shareholders
- Refusing dividend payments
4. Minority Oppression
This may happen when large numbers of shareholders abuse their power by forcing buyouts at unfair value, withholding or paying dividends disproportionally or diluting minority interests
5. Breach of Director Duties
Where one or more directors, who may also be shareholders, fail to act in the best interest of the company, it may give rise to derivative actions on behalf of the company.
How Nath Solicitors Can Help
We take a strategic, commercially-minded and tactical approach to find the best way to resolve shareholder disputes. In addition to securing your legal entitlements, we look at the overall context of the dispute ensuring that we:
- Preserve and maximise the core business value
- Manage any internal fallout from the dispute and the external PR
- Put procedures in place to deal with future harmful conduct
- Act quickly to freeze assets where necessary
Case Study – Dispute Between Founding Shareholders
What happened
Two joint, founding shareholders of a company were in dispute. The two friends had set up and grown a successful company that produced and marketed food products. There was no shareholder agreement in place although it was accepted that each party held 50% of the shares. A dispute arose which meant the two could no longer continue in business together.
What we did
After advising our client, they made an offer to take over outstanding loans of the company and to repay the other shareholder a further loan she had made to the company. Repayment was structured over a number of years and payable from the distributable profits of the company. In return the other shareholder agreed to enter into a share transfer agreement and sign a stock transfer form for the transfer of her shares to our client.
The Legal Remedies
At Nath Solicitors, we typically advise on and approach shareholder disputes using the following legal tools:
Unfair Prejudice Petition under s.994 of the Companies Act
This gives a shareholder the right to petition the court when a company’s affairs are being run in a way that is unfairly prejudicial to their interests. A common ground may be the dilution of minority shareholdings or withholding dividends.
Where these grounds are established, the court may make a range of orders, including an order that the majority buy out the minority’s shares are at fair value.
Injunctions
Injunctions are a highly effective legal remedy used to prevent damage to the company or shareholders occurring before a full hearing of the issues in dispute can take place. Depending on the nature of the shareholder dispute, an injunction can provide emergency relief, protecting majority or minority shareholder interests while legal proceedings are underway but have not reached a conclusion. At trial a temporary or interim injunction can be made permanent.
Just and Equitable Winding-Up
Usually a last resort. This involves petitioning the court to dissolve the company.
Derivative Actions
These allow a shareholder to bring a claim on behalf of the company when a wrong has been committed against the company and the directors or the company itself fail to act on the wrong. Derivative actions can arise from misappropriating assets, breach of duties and other matters. A shareholder who brings a derivative action is in effect acting in place of the company. Damages obtained are paid to the company, not the shareholder.
Negotiated Exit or Settlement
At Nath Solicitors we regularly help minority shareholders achieve favourable exits through negotiation or enforcement of their rights under tailored buy-out provisions within shareholder agreements.
Maintaining Shareholder Relationships and Personal Reputations
In addition to the focused, commercial approach we’ve described, Nath Solicitors fully understands that, aside from the technical legalities of the case, shareholder disputes may also be heavily emotionally charged and reputation sensitive. Our job is to be alert to these additional considerations and advise clients appropriately, always bearing in mind the real-world impact legal action will have.
Contact Us
If you need advice on how to protect minority shareholders’ rights, contact Nath Solicitors on 0203 983 8278 or get in touch with us online. We are committed to delivering tailored solutions and ensuring the success and equitable treatment of all parties.