Coronavirus & disputes between directors and shareholders

For some private companies, the coronavirus disruption and the management of a business going forward will lead to disputes between directors and shareholders.

 

The pressures on those businesses returning, and restarting their operations in a different world, may result in some shareholders feeling that Directors have breached their duties to the company.

 

Mike Doherty, associate in Wake Smith’s litigation and dispute resolution team, specialises in these types of disputes and can provide advice on the options available.

 

Mike said: “COVID-19 has caused and will continue to cause, numerous problems for businesses, which may lead to disputes between shareholders and directors.

 

As a shareholder, you should carefully review your rights. If you cannot resolve a dispute through open discussion then the Shareholders' Agreement should be the first stop, followed by the company’s Articles of Association.

 

Both these are essential to control and protect your interest in a limited company and regulate disagreements.”

 

A Shareholders' Agreement is designed to protect a shareholder’s investment in a company, to establish a fair and equitable relationship amongst the shareholders and to help govern how the company is run. It is generally considered the best way for shareholders to protect their interests in a limited company.

 

It helps regulate disagreements amongst shareholders and will help to avoid the need to seek redress from the courts.

 

They can be bespoke to the collective or individual needs of the shareholders, and can also set out specifically how disputes should be resolved. This is especially important where there is an equal or even shareholding in a company where decisions cannot be easily passed without a majority.

 

Mike said: “Common methods of dispute resolution in Shareholders' Agreements are below and which option is appropriate for your company may be down to time, cost and the financial position of the different parties.”

 

Shareholder Agreements’ dispute resolution actions:

  • The Chairman of the board of directors has a casting vote.

  • Referral to a third party expert or mediator.

  • Put and call options - the holder of the option may require other shareholders to buy or sell their entire shareholding at a price consistent to a pre-determined formula.

  • Russian roulette - one shareholder offers the other shareholder a simple choice to either buy all of the shares off them, at the price proposed, or sell all of their shares to them at the same price.

  • Texas shoot-out – disputing shareholders provide sealed bids to buy out the other party's shares. The shareholder with the highest bid buys out the other shareholder.

 

If no Shareholders' Agreement is in place, parties can look to the company's Articles of Association, or Articles.

 

Mike added: “These are a company's rulebook and set out how the company's workings are governed. Every company is required by law to have a set of articles in place.

 

They contain provisions relevant in a shareholder or director dispute such as whether shareholders can remove or appoint new directors and the transferring of shares; and detail the specific requirement needed to pass these resolutions.

 

It is also important for companies to ensure that Shareholder Agreements and related Articles of Association do not contain contradictory terms.”

 

The final option, and often last straw, to a discontented shareholder is an Unfair Prejudice Petition. Here, an application to the court for relief is made where a shareholder believes the company’s affairs are being conducted in an unfair and prejudicial manner to their interests, including financial.

 

Mike added: “An Unfair Prejudice Petition is usually a remedy for minority oppression, especially within smaller companies such as unlisted, small and medium sized enterprises.

 

Unfair Prejudice Petitions are personal actions; they are brought by one shareholder against another (or others). It is important, therefore, that the company itself remains neutral in these disputes.”

 

If the court finds that unfair prejudice has taken place, it can:

  • order a respondent shareholder to purchase the shares of the applicant shareholder;

or, if deemed more appropriate,

  • also allow the applicant shareholder to buy the respondent shareholder’s shares at a set price.

 

For further information on Shareholder/Director disputes and Unfair Prejudice Petitions please contact Mike Doherty at Wake Smith on 0114 266 6660.

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