Disagreements between shareholders are a common challenge for private companies, with 76.1% of C-suite executives encountering shareholder disputes on a frequent basis.
The expectations and priorities of shareholders often shift as a business grows, leading to conflicts over decision-making, management, or the company’s future direction.
While some businesses have clear governance structures that can help navigate these issues, others may operate with more informal arrangements, which can become problematic if disputes occur.
For company directors and shareholders, understanding how to resolve shareholder disputes effectively is key to preserving business stability and individual interests. This requires various resolution methods such as negotiation, mediation, and if necessary, court action.
We’ll explore these resolution strategies and the common causes of shareholder disputes below, so you can understand how to address conflicts and support the long-term health of your business.
How Shareholder Disputes Affect Businesses
A shareholder dispute may occur between shareholders themselves or between shareholders and company directors. This involves key business matters, such as profit distribution, company management, or strategic decisions.
Shareholder disputes can have serious consequences for a company, affecting its stability and long-term success. These conflicts can lead to decision-making deadlocks, disrupting daily operations and delaying critical business strategies.
No business, whether large or small, is immune from such disagreements, as differing interests naturally emerge over time.
Common Causes of Shareholder Disputes
Shareholder disputes can arise from a few key issues, including the following:
- Management Issues: Concerns about the performance or competence of company leadership.
- Voting Rights and Share Dilutions: Tensions over changes to voting power or shareholding structures.
- Minority Shareholder Concerns: Minority shareholders feeling excluded or unfairly treated in decisions.
- Breach of Fiduciary Duty: Allegations of misconduct or mismanagement by company directors to act in the company’s best interests.
- Shareholder Deadlock: Situations where equal shareholders cannot agree.
These shareholder dispute causes can escalate quickly if not addressed, affecting business operations and stability.
What Legal Rights Do Shareholders Have In A Dispute?
Shareholders are granted legal rights that they can exercise during a dispute, depending on the situation and the company’s governing documents.
These key rights include:
Unfair Prejudice Claims
One of the most frequently used powers for shareholders in a dispute is the right to claim unfair prejudice under Section 994 of the Companies Act 2006.
Shareholders can ask the court to intervene if they believe the company’s affairs are managed in a way that harms their, or other shareholders’ interests.
To succeed in an unfair prejudice claim, the shareholder must establish that prejudice occurred and that the conduct was unfair.
Examples of unfair prejudice include:
- Mismanagement of company affairs
- Majority shareholders ignoring the rights of minority shareholders
- Misappropriation of company assets
- Denying access to company information that shareholders are entitled to receive
- Dilution of shares by creating new ones, without consultation with shareholders
- Directors taking large sums as bonuses while withholding dividends from shareholders
Derivative Claims
Under Section 260 of the Companies Act 2006, minority shareholders have the right to bring a derivative claim on behalf of the company, if they believe a director has acted improperly.
This claim stems from the company’s rights, not those of individual shareholders. A derivative claim can be made if a director has:
- Acted negligently
- Breached their duties or trust
- Engaged in misconduct or default
Initiating a derivative claim requires court approval, and if successful, the court may impose various remedies. This might include having a director pay damages, removing a director, or reversing wrongful transactions.
Shareholders will not personally benefit from these claims, but the company does. The court may also order the director to pay the shareholder’s legal costs, if the claim is upheld.
Winding Up Petitions
In extreme cases, a shareholder can petition the court to wind up the company, under Section 122 of the Insolvency Act 1986. This is considered a last resort and should not be undertaken lightly, as this involves dissolving the company.
The court will assess whether it is ‘just and equitable’ to wind up the company, often taking into account breaches of the company’s governing documents or unfair actions by directors.
Examples of situations that may lead to winding up a company include:
- Directors acting dishonestly or incompetently, damaging company performance
- Shareholder deadlock that makes the company unmanageable
- Breaches of shareholder agreements or company articles of association
- Directors failing to uphold their duties, resulting in prejudice to minority shareholders
To successfully petition for winding up, a shareholder must prove that the company’s actions have caused unfair prejudice to their interests, and that these actions justify dissolving the company.
How To Resolve Shareholder Disputes
Resolving shareholder disputes often requires a tailored approach depending on the specific situation, the company’s governing documents, and the relationships between the parties involved.
- Review the Shareholder’s Agreement: If the company has a shareholder’s agreement, it’s crucial to review it first, as it may outline the process for resolving disputes. This may involve specific steps for negotiation or mediation.
- Negotiation: Shareholders and individuals involved in the dispute will try to reach an agreement through open discussion. This could be done directly or with the help of solicitors, aiming for a mutually beneficial resolution.
- Mediation: Mediation involves a neutral third-party mediator who facilitates communication between parties to find a fair solution. This is often preferred as it’s less adversarial and can resolve conflicts faster than litigation.
- Court Action: Litigation may be necessary if other methods fail. Shareholders can take legal action, such as filing for an unfair prejudice claim if they feel their interests are harmed.
How Solicitors Help With Shareholder Disputes
Solicitors play a crucial role in managing shareholder disputes by offering expert legal advice on shareholder rights and responsibilities.
A solicitor will evaluate the dispute and clarify legal positions based on company documents and relevant laws. They guide clients through alternative dispute resolution methods, like mediation and negotiation, aiming to resolve disputes without court intervention.
If negotiations fail, solicitors can initiate legal proceedings, representing shareholders in court, and seeking remedies such as damages or injunctive relief.
Additionally, solicitors can help develop proactive strategies to prevent future disputes, maintaining long-term stability for the company and its shareholders.
How We Can Help
At Harding Evans, we understand that shareholder disputes can be complex and damaging to a company.
Our commercial litigation solicitors can offer expert guidance to help you navigate these challenging situations.
Contact us to speak to a member of our team.
