Even the most carefully crafted shareholder agreement won’t be able to anticipate every eventuality or all possible ways the relationship between shareholders of a private company might rupture. Nath Solicitors in London works with a wide range of small and medium-sized companies where directors and shareholders are often the same individuals. This scenario can make the fallout from internal company disputes particularly severe – and inject urgency into the search for a practical solution. Here we look at some of the reasons disputes arise. We’ll also outline some of the best ways to resolve shareholder disputes.
Running a company is stressful. And as an organisation develops, different members may start to pull in opposite directions. As priorities change disputes might arise over things like:
• Payment of dividends
• Commercial objectives
• Profit share
• Personal animosity
• Retirement and exit terms
Disputes may arise between different classes of shareholders, between shareholders and directors and between an individual shareholder and the company.
What should members of a company do when a dispute arises? Particularly when it has the potential to damage not just a company’s profitability but its reputation among clients and consumers?
We’ve explained previously the importance of having a comprehensive shareholder’s agreement in place to help resolve disputes. If you don’t have one in place when a shareholder dispute arises it’s sometimes helpful to suggest negotiating one and address the fundamentals of the current dispute within the terms of a new shareholders’ agreement.
If there is an agreement in place you should check to see what it says about handling shareholder disputes. Many disputes arise over how to place a value on the holding of a shareholder who wishes to leave the company. A shareholder agreement will often contain a formula for valuing shares in a range of scenarios. The ability to rely on such a formula when a dispute arises will enable you to settle the dispute in a straightforward and cost-effective manner. Shareholder agreements can also provide for the compulsory acquisition of the shares of a departing member and can prevent one shareholder blocking transactions that the bulk of members wish to pursue.
Depending on the provisions of your shareholder agreement and articles of association you may decide that appointing a new director – one with specific expertise of the subject matter of the dispute – might help you reach a workable solution to the dispute. Or it might be useful to engage external advisors, such as solicitors, management consultants or accountants who can offer an independent perspective on the issues at the heart of the dispute.
Company legislation enables those with at least 5% of the company’s voting rights to force the Board to hold a general meeting. Such meetings can enable the members of the company to force the issue in dispute by voting on it – or at least provide a platform for disgruntled shareholders to air their grievances. They may subsequently enter into discussions about how to resolve the dispute in the best interests of the company and the shareholders.
Litigation is usually the last resort in finding a resolution to shareholder disputes. Is there room for informal, face-to-face negotiation where the parties in dispute can reach a compromise to avoid costly legal action? For example, would a buy-back of the shares held by shareholders in dispute be an effective way to end the dispute? The involvement of solicitors is advised to ensure that any agreement reached through negotiation is legally binding.
It’s also open to members of the company to use ADR to settle the dispute. Perhaps the most common form of ADR for shareholder disputes is mediation where an independent mediator helps narrow down the issues to facilitate agreement. Mediation is entered into voluntarily but if an agreement is reached the parties can sign a legally binding settlement – usually with the help of solicitors. Sometimes courts will oblige parties to attempt mediation before litigation. It’s a private process, held on a without prejudice basis so that parties to the mediation don’t have to worry about discussions during mediation later being relied on by the other side in court.
These are just some of the main ways you can approach a shareholder dispute. If you need further guidance please contact Nath Solicitors on 44 (0) 203 670 5540 or contact the firm online.
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