When a shareholder dispute arises, it can be tempting to assume that every breach by a shareholder, director or company member is treated in the same way. In reality, English company law distinguishes between breaches according to the legal source of the obligation. This distinction can significantly affect how the dispute proceeds, the grounds upon which a claim may be brought and the remedies available, including damages.
Sources of Obligation / Legal Foundation
The origin of the obligations arising from a shareholder’s agreement and the Companies Act 2006 are very different. A shareholders’ agreement in essence is a contract and is only binding on the people who have signed it. The agreement also represents a common understanding of the operation of the specific company, such as the allotment of new shares, sale of shares to non-members, non-compete clauses, or the distribution of dividends. These agreements are typically customised to accommodate the interests of the particular company and its shareholders.
The Act, however, generally covers broader rules such as directors’ duties, regulation of share capital, and the fair operation of company matters.
Multiple Claims
There may be some circumstances where the same set of facts give rise to different claims under both the shareholders agreement and the Act. For example, if a director-shareholder diverts a business opportunity for themselves when it should have been put through the company, it may breach a non-compete clause signed by all shareholders in the company and the Act at the same time.
In these circumstances, shareholders can therefore bring a claim for damages or apply for an injunction. On the other hand, a further consideration is that as a director they will also have breached their statutory duties to avoid conflicts of interest under Section 175. In this case, the company is the aggrieved party and the claimant of the action. In addition, depending on the facts of the case, an unfair prejudice petition under Section 994 of the Act may also be available to some shareholders. This is a separate claim in itself.
Multiple claims are complex and requires the specific facts of each case to be examined carefully to determine the most favourable course of action and type of claim for the aggrieved party.
A breach of the shareholders agreement is strictly a contractual dispute and only applicable to the parties who have signed the agreement. Here, a claim can be brought for the usual remedies, such as an injunction or damages.
A breach of directors’ duties may be a less fruitful claim for individual shareholders as the duties are owed to the company as a whole and not any particular individual. Furthermore, there may be difficulties bringing an action against the director in question as their role is to control and oversee all company decisions. That said, a derivative claim may be available, where a shareholder is able to bring a claim on the company’s behalf, although this requires the court’s permission. It must be noted that this threshold is exceptionally high, and claims may not be accepted unless there is considerable chances of success.
An unfair prejudice petition does not require proof of a breach of contract or duty; rather, it relies on how the company’s affairs have been unfairly conducted against how the arrangement was understood and expected by shareholders. In these circumstances, the court has a wide range of remedies available, with the most commonly used being an order for the majority shareholder(s) to buy out the minority at a fair price.
If You Are Involved in a Dispute
Here are a few useful points to note:
Limitation period: a claim for breach of contract must be brought within six years, while unfair prejudice petitions are less rigid. Regardless, delay in making the application may still affect the availability of certain remedies.
Legal costs: breach of contract claims tend to follow regular cost rules, but unfair prejudice petitions can be lengthy and costly. Here, there has been an increase in willingness by the courts to encourage alternative dispute resolution.
Strategy: the strength of a shareholder’s claim is usually dependent on the quality of the shareholders’ agreement itself. Relying on a carefully drafted and extensive shareholders agreement offers better chances for obtaining swift remedies. While the law remains a key safety net, ideally, shareholder agreements should be bespoke and tailored to the specific companies’ structure and operations.
If you require help with shareholder disputes, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.