How shareholder disputes may arise
Disputes between shareholders of a private company are not unusual and can arise over a wide range of issues, including disagreement as to the approach or management of the business, the conduct of shareholders and/or directors, company incentives and overall direction. Often, the minority shareholders feel that their rights are not being observed or are being diluted, that there is a lack of consultation / provision of information, that company assets are being misappropriated, or that directors are taking large sums out of the company in circumstances where dividends are not being paid to shareholders – these types of disputes can give rise to claims of unfair prejudice.
Real care is needed to navigate a path through the issues but with minimum disruption to the business (current and future). Our multidisciplinary team of litigation, corporate and employment specialists can guide clients to achieve this.
Is litigation avoidable?
Yes, in most cases – but pragmatic and early intervention is crucial to understand what the stakeholders want to achieve, and to prevent positions from entrenching to the detriment of the business and shareholder value. These are often emotional situations (especially where the business has been grown by a limited number of shareholders), so there needs to be an element of objective detachment in the decision making where possible and to focus as much as possible on what is in the best interests of the business. Often, the best starting objective is to steer the situation away from a formal dispute through guidance, negotiation, use of company law rights and resolution mechanisms such as mediation.
What are the potential outcomes of shareholder disputes?
Shareholder dispute scenarios are intertwined with a matrix of complex issues, including shareholders’/JV agreements; employment rights; whistleblowing; directors’ duties; directors’ rights and removal; investigations into conduct; corporate governance; duties arising from the financial difficulty or insolvency of one or more entities; reputational concerns; commercial sensitivities; minority shareholder rights and/or regulatory obligations. Despite this, the potential outcomes of shareholder disputes are usually more limited;
- broad agreement is reached and (sometimes an uncomfortable) cohabitation / status quo persists (or is ordered by the court);
- one shareholder or shareholder group buys the other(s) out;
- the business fails and value is lost (or the deadlock is so severe that the court winds up the company as there is no other viable path); or
- one shareholder seeks to utilise insolvency and company law procedures to build a new business entity without the constraints, history or debts of the existing vehicle.
Whether or not agreement can be reached so that the status quo can persist will depend largely on the extent of the damage already done; whether value remains; whether the stakeholders are on board and it is a viable long term strategy. Status quo agreements are unlikely to have a long shelf life where the dispute has had a lasting impact on the morale of stakeholders as this usually affects the long-term success of the underlying business.
What if the dispute cannot be resolved amicably?
In these situations, formal proceedings are often the next step and Wedlake Bell is hugely experienced in advising shareholders and directors through the necessary dispute process either as an end in itself or on the path to helping to reach a negotiated agreement. This may also include a confidential arbitration process, unfair prejudice proceedings brought under s994 of the Companies Act 2006 or proceedings to wind up a company on just and equitable grounds. There are a range of funding options available for clients, which can be considered on a case by case basis.