I probably won’t live this down but I have a musical guilty pleasure in country and western, specifically Taylor Swift. I didn’t think that weakness would ever overlap with work. To be fair, Taylor probably wasn’t thinking about section 994 of the Companies Act or a shareholders’ dispute when she wrote “we are never, ever getting back together” but maybe she has a guilty pleasure in UK corporate law…
But that is a sentiment that will resonate with many unhappy shareholders. They have worked hard to build and invest in a family business over a long period of time and now it has broken down. They are never getting back together and so something needs to be done to avoid a race to the bottom.
Disputes between shareholders happen for many reasons: differing views on direction; conduct issues; business culture; and remuneration/ incentivisation are just a few. But even where relations have broken down it is vital that the dispute between the shareholders has minimum impact on viable businesses. Sometimes the shareholder issues are inextricably linked to the business but in some circumstances the issues can be addressed at “parent level“ and the underlying business can be sufficiently protected pending the outcome. But the parents don’t always engage or play by the same rules and they may not have regulated the relationship in an agreement prior to going into business, so the possible outcomes of a shareholder dispute are limited to one of the following:
- broad agreement is reached between shareholders and an uncomfortable cohabitation persists (or this is ordered by the court);
- one shareholder/ set of shareholders buys out the other;
- the business fails and value is lost (or the deadlock is so severe that the court liquidates the company as there is no viable alternative path); or
- one shareholder seeks to utilise insolvency laws to start a new business entity without the debt history of the existing vehicle.
The buy-out option is often the least unpalatable option – but unless the corporate documentation is clear or there is a court order– someone needs to be willing to sell and it is usually, but not always, the minority that sells. With pragmatic advice and an open approach, more often than not, a commercial and tolerable solution can be found.
Careful thought needs to be given to what exactly the desired outcome is, whether that is achievable and what are the hurdles to achieving that? But those expectations need to be measured by a large dose of reality, pragmatism and usually compromise. These types of disputes are a complex matrix of emotion, history, commerciality and law. That is then layered with issues relating to tax planning, succession, jurisdiction differences, confidentiality and reputational issues. But it still remains that shareholders should at least try to work together to avoid corporate Armageddon so that shareholder value is preserved – for the benefit of all parties.
With this approach there is usually a solution that is acceptable to all even when it seems that the shareholders were “never, ever getting back together”.
Wedlake Bell’s Private Client team works closely with the Commercial Disputes team in helping shareholder clients achieve a positive outcome in any dispute, both for their business interests as well for their tax and estate planning.