Shareholder disputes can cause massive issues for the other shareholders, clients and the company as a whole and are definitely something any business would want to avoid.
However, sometimes such disputes are unavoidable, and, in such situations, there are steps you can take to resolve a disagreement.
In this article, Corporate & Commercial Solicitor Zoe Watson outlines your options to resolve shareholder disputes.
What are the common causes of shareholder disputes?
Disputes between shareholders can arise in many ways but are often down to differences of opinion which result in a breakdown in communication.
Some common causes include the following:
- Shares, splitting them, their valuation and transfers of shares
- Disagreements over management, day-to-day or otherwise, such as strategy, recruitment, performance etc.
- Finances, such as disputes over contributions or earnings
- Breaches of shareholder agreements
- Selling the company, or buying out a shareholder
- Personal issues, different expectations and more
How to resolve shareholder disputes
Informal and open negotiation should be the first step to resolving a conflict between shareholders.
Discussions can be beneficial as a dispute can be resolved before additional, sometimes costly, steps are taken such as Court involvement.
It is in everyone’s best interests to resolve disputes as early as possible, so no party has to spend time and money on legal intervention, the added benefits are that relationships don’t deteriorate beyond repair and public perception of the company isn’t negatively affected.
The best way to mitigate shareholder disputes, i.e. prevent them from even happening, is to ensure that the shareholders enter into a shareholder agreement as early as possible.
Although it’s not a sure-fire preventative, an agreement of this sort gets everything out ‘on the table’ and can give shareholders more protection against problems arising.
Related: What is a shareholders agreement and what should it include?
What are the options for dispute resolution for shareholders?
Assuming early informal negotiations fail, you may need to take additional steps, as follows, to resolve a dispute between shareholders.
Mediation
Mediation involves hiring a neutral third party to assist in discussions and help the parties come to an agreement that is acceptable to everyone involved.
This is an intermediate step between informal discussions and court proceedings. Mediation is less costly and aggressive than Court proceedings, but more formal than initial negotiation.
However, mediation can take longer than traditional litigation and neither party is bound by anything agreed upon in mediation unless a legally binding agreement has been signed.
Share buy out
One of the disputing parties could buy out the other’s shares in the company, however both parties would need to agree to the price to be paid for the shares and deal with the impact on any third parties, such as releases from any personal guarantees and repayment of shareholder loans.
A share buyback could be also be a suitable solution to a shareholder dispute if the party in question agrees to selling their shares back to a company and a price can be agreed on.
However, there are restrictions in the companies act relating to how buybacks can be lawfully funded and so the parties will need specialist tax advice in addition to the requisite legally binding contracts.
Related: A guide to share buybacks
Court action
Litigation is generally considered the last stand, if all other methods of negotiation and mediation fail. In litigation, parties can use the Court to come to a suitable agreement.
Court involvement does usually consist of one party filing a lawsuit against another so relationships may be damaged within the company, but it can be necessary where all other methods fail or if serious wrongdoing has taken place.
The risks of litigation include the potential remedies that the court may propose as this will include the just and equitable winding up of the Company, a resolution that is rarely desirable for either side.
Sell the whole company
Finally, another potential solution is selling the whole company. This would usually happen if a disagreement is beyond repair and the parties involved agree that selling the company is the best way forward.
You can read our guide to selling a business here.
What happens if you breach a shareholder’s agreement?
If a shareholder breaches the terms of an agreement, perhaps by not meeting their obligations or by making a decision without the agreement of the majority of shareholders, it can cause problems for the other shareholders and the company as a whole.
You can read our dedicated article on resolving breaches in shareholder agreements here.
Do I need a solicitor for a shareholder dispute?
It is highly recommended that you seek legal advice early on during a shareholder dispute, so a lawyer can assist you in reaching a solution quickly and cheaply.
Commercial Litigation Solicitors
At Frettens, our specialist Commercial Litigation team, who were recently recommended in the Legal 500, can assist you in litigation and ensure a fair outcome that benefits you.
We would be happy to discuss your individual circumstances with you and provide tailored advice over a free initial appointment.
You can call us on 01202 499255 or fill out the form at the top of this page to get in touch.
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