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Shareholder Disputes
Shareholders own a company but delegate the running of the company to its directors. The shareholders retain overall control though as, for example, a majority of shareholders (more than 50%) can remove a director from office.
But what happens if a shareholder/director is unhappy with the way in which the business is going or the conduct of the other director/shareholders but does not own a majority of the shares? What if a company is run by 2 people who split the shares 50/50 but can no longer work together due to different visions for the company’s future? What if there is nothing particularly wrong, but a shareholder wants out of the business and to release the value of their shares. What can they do?
Minority shareholder rights
A shareholder (or shareholders together) who owns less than 50% can be outvoted on most decisions. However, the courts will defend minority shareholders against decisions or actions taken by the majority which unfairly prejudice them as shareholders.
A Judge can make a number of orders although the most common is that the majority must buy the minority’s shares for a fair price, having made adjustments for the unfair prejudice.
Example of unfair prejudice include:
- Exclusion from management when directors might expect to participate
- Failure to pay dividends
- Excessive remuneration awarded to some directors
- Directors acting in breach of the duties they owe to the company
- Shareholders acting in breach of restrictions in contractual documents
Deadlock
The classic example is where there are 2 directors/shareholders and each own 50% of the shares. If their relationship breaks down, then there is deadlock at board and shareholder level. The company is, strictly speaking, paralysed.
If neither shareholder is willing or able to buy out the other, a Judge might consider it is necessary to wind up the company, sell its assets, pay its creditors and distribute what remains to the 2 shareholders. This is something of a last resort given its severe effects.
Directors’ behaving badly
What can shareholders do if one of the directors has been ‘up to no good’? Directors owe a vast amount of duties and, crucially, to the company itself rather than the shareholders individually. If a director acts in breach of those duties, then it is the company who must make a claim against them. The director maybe in a position to block this in which case the shareholders can ask the court to give them permission to ‘stand in the shoes’ of the company and bring a claim in its name using company funds against the director.
A director must act within their powers and in the interests of the company rather than their own in all areas of the business. If they have allowed their own interests to prevail usually directly profiting financially, then the company can claim against the director personally to reimburse the company for losses suffered either directly via the remaining directors or via shareholders bringing what is call a derivative action with the permission of the court.
No wrongdoing but a shareholder simply wishes to leave and sell
The Articles of Association (a company’s internal rulebook) and/or a Shareholders’ Agreement may stipulate what must happen in these circumstances. If not, there is no ready market for shares in a private company and no right to compel someone or the company to buy the shares. Please see our article here where we explore this further.
Prevention
As always, prevention is better than cure. Although not a solution for all difficulties , a well drafted Shareholders’ Agreement can help avoid or at the very least minimise the likelihood of disputes arising. The team here at Bermans has a wealth of experience of advising on bespoke agreements tailored to your needs and the needs of your fellow shareholders.
How can we help
Claims such as these can sometimes be resolved via negotiation without the need for court action. The team here at Bermans have decades of experience in pursuing and defending such claims vigorously and cost effectively as well as achieving negotiated outcomes.