Shareholder Dispute Solicitors
What is a Shareholder?
A Shareholder (or member) is an individual, company, or institution that owns at least one share of “stock” (a share) in a public or private corporation (most often a Limited company), making them a partial owner of the business.
Each shareholder/member owns a piece of the company. Each share typically entitles the shareholder to receive a portion of the company profits, and/or the right to vote on how the business is controlled and/or a right to a share of surplus assets if the company is wound up or liquidated. So, the higher percentage of the total company shares held by the shareholder often coverts to more power in decision making and a bigger slice of any profits.
A company can have just one shareholder, but it is when there is more than one shareholder that disagreements and disputes can arise, and solicitors may need to become involved.
Where do disputes come from?
In an ideal world, all the Company shareholders will have, in advance, agreed rules and procedures to deal with any disputes which may arise. These can be set out either in the legally required Company constitution i.e. the “Articles of Association”, or more commonly in a “Shareholders Agreement” between the shareholders themselves.
Most growing businesses use both with the public Articles of Association dealing with the Company’s legal requirements (and being published on Companies House), and the private matters (such as deadlock provisions) being in the Shareholders’ Agreement between shareholders only.
Shareholders’ Agreements often include:
- Detailed exit strategies, like “drag-along” and “tag-along” rules
- Protections for minority shareholders (such as veto powers).
- How to handle deadlocks if owners disagree
- Rules to stop former owners from starting a rival business (non-compete clauses)
Common disputes
Deadlocks
Common disputes, which we see, arise when there are either no provisions set out for disputes, or they are badly drafted and unworkable. Generally, the more shares a holder has then the more control they have. If a shareholder has 50% of the shares plus at least one share then they control most of the main day to day decisions for the Company. More serious decision can be taken (such as changing the Company constitution, or winding the Company up require at least 75% of the shares
For example, a common situation is where two people (sadly, this is often friends) with all the best intentions set up a limited company with their respective shareholdings of 50/50. But they don’t make a shareholders’ agreement (often to avoid any awkward discussions, and maybe not to ruin the excitement of a new business).
They start trading with no shareholder agreement in place and therefore no deadlock resolution provision if they fall out. The issue here is the real control of a Company arises if you have 50%+1 share. So, as each has 50% of the shares, the result often is a “deadlock” with neither able to make an enforceable decision, and there is no agreed way forward. This is often where we get instructed i.e. to resolve the deadlock by seeking an agreement with the other shareholder either on a way forward, or, if that fails, to litigate for the client.
Family Disputes
Disputes in family businesses are also common as there are often multiple family members (old and young) with different shareholdings and different objectives. So, while the law is the same the human dynamics become a major factor. The lawyers role here is to navigate the legal and the emotional issues.
Disputes – Claims and Petitions
However, even when there are provisions for deadlocks and other difficult situations, our clients can find these provisions are either not applied properly, or that the rules are being weaponised against them as cliques and factions form between shareholders.
Generally, if a dispute can’t be solved with discussion, then the following legal claims and petitions come into play by either side in the dispute:
- Unfair Prejudice Petitions (Section 994): Minority shareholders bring these claims under the Companies Act 2006 when majority owners run the company in a way that harms their financial or management interests. However, while it is often “minority” shareholders who find themselves in difficulty, these claims don’t need the client to be in a “minority”. It just needs to one group of shareholders being unfairly treated by another for a potential action.
- Derivative Actions: Shareholders file these claims on behalf of the company against directors accused of illegal acts, negligence, or breach of fiduciary duty.
- Breach of Directors’ Duties: Claims alleging that a director failed to act in the best interest of the company or abused their position for personal financial gain.
- “Just and Equitable” Winding-Up Petitions: A last-resort court application under Section 122 of the Insolvency Act to liquidate the business due to deadlocks or broken trust. This is also often raised if a deadlock can’t be resolved. The petitioning party must persuade the Court that a winding up is “just and equitable”.
- Breach of Shareholders’ Agreements: Claims focused on enforcing specific contract terms, restrictive covenants, or drag-along and tag-along rights.
- Share Valuation Disputes: Disagreements over how to price a departing member’s shares during an exit or buyout. This is where there may be well written procedures to resolve disputes, but the departing/complaining shareholder is unhappy with the valuation of their shares.
In Summary
If you are concerned about or find yourself in a dispute with your fellow shareholders, then feel free to contact David Magill who will be happy to guide and advise you.
Email: David.Magill@simonburn.com