Shareholder Disputes

How do you avoid a shareholder dispute?

Shareholder disputes can have a serious impact on a business.  There’s the obvious financial cost to finding a resolution carries but there is also likely to be operational disruption, reputational damage, and the need to divert management time and resources away from building the business to handle the dispute.

In extreme cases, disputes can prevent key strategic initiatives like acquisitions or new product launches from progressing. This could affect market position and lead to conceding  market share to competitors.

The good news is avoiding shareholder disputes is fairly straightforward as long as you are willing to take certain proactive steps.

What can you do to prevent a shareholder dispute?

In short you need to achieve clarity and alignment in terms of your shareholder responsibilities. 

To do this you should:

• Put a clear, structured Shareholder Agreement in place

This agreement should define the roles and responsibilities of the shareholders including their individual roles, their duties, their decision-making authority and their voting rights.  The agreement should also include a dispute resolution clause in case a dispute does arise and the procedures that will need to be followed should a shareholder decide to exit or sell shares.

• Implement an effective governance structure

Maintain a well-structured board of directors with clear terms of reference and decision-making protocols supported by policies for operations, finance, and compliance. 

You should also ensure the board is supported with the proper documentation, including a shareholder register, minutes for all meetings and documenting any agreements made by directors and shareholders including loans or other personal contributions from shareholders.

• Maintain financial clarity

Provide accurate and timely financial reports to keep shareholders informed as to the financial position of the business, supported by independent assessments to minimise possible mistrust.

• Make provisions for both Minority and Majority shareholders

Make sure the provisions only allow directors to make decisions while respecting minority shareholders’ rights and protect minority shareholders from unfair treatment.

• Prepare for potential changes

Make sure potential succession planning issues have been addressed, including procedures for issuing new shares or changing share classes.Bottom of Form

• Allow open communication between shareholders

There should be regular shareholder meetings to discuss performance, plans, and any concerns but there also needs to be open communication between these meetings so issues can be addressed as they arise.  Timely action is often enough to prevent disputes.

The shareholder meetings should also provide a forum at which strategy and the business plan can be reflect upon and, if necessary, updated.

How can shareholder disputes be resolved?

There are several ways to resolve a dispute. These include negotiation (a reasonably informal group discussion), mediation (using a neutral accredited mediator to help you come to an agreement), and arbitration (a more formal process than mediation, where an arbitrator makes a binding decision).  All these options will help you avoid having to go to court. You could also offer to buy out an  aggrieved party’s shares but if none of these methods brings about a settlement, you may need to go to court to achieve a resolution.

If you do choose to litigate, there are several possible routes depending on the nature of the dispute:

• If you are a minority shareholder and feel that your business interests are being unfairly harmed, you could launch an Unfair Prejudice Petition under Section 994 of the Companies Act 2006.
• If you feel one of the company’s directors has breached their duties, you could launch a Derivative Claim.
• If the court can be persuaded that it is no longer feasible for shareholders to work together, you could apply to wind up the company.

These are only a few of the options and the best course of action will always depend on the circumstances surrounding the dispute.  This is why it is critical you take legal advice from an experienced commercial litigator before taking any action because taking a misstep early on could very well leave you unable to recover your position.

If you are involved in any form of commercial dispute, please contact Michael Doherty in our Litigation team to arrange an initial free consultation.