When a Shareholder Dispute Arises
Shareholder disputes can be common in private companies. As the company continues to grow and develop, and time passes, shareholder interests can diverge and depart from one another.
The likelihood of a shareholder dispute is also increased where there is no shareholders’ agreement in place setting out well designed procedures and authority in the ownership and management of the company.
As is also often the case in private companies, the shareholders might be the directors too. As a result, where and how a dispute arises can have a detrimental impact on the business being able to operate day to day.
The scenarios that we often come across include:
- Shareholders who want to go separate ways;
- Disagreements over how the business is being managed;
- A shareholder being excluded from management of the company;
- A deadlock between the shareholders;
- A minority shareholder being unfairly treated;
- Shareholders wanting to force the exit of another shareholder;
- Disagreements over a clause in the shareholders’ agreement; and
- An employee shareholder has been dismissed, and there is no procedure relating to their shares.
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How Loch Law can help
The solicitors at Loch Law have extensive experience drafting legal documents such as articles of association and shareholders’ agreements. Both of which can reduce the likelihood of a shareholder dispute.
Where a shareholder dispute arises, our team of expert solicitors can assist with:
- Advising and negotiating under a shareholders’ agreement;
- Unfair prejudice petitions;
- Winding up petitions; and
- Bringing claims against directors as a shareholder.
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What is a shareholders’ agreement?
A shareholders’ agreement is a contractual document used to regulate and set out procedures in respect of how the shareholders of a company operate together.
The agreement might also include guidance for shareholder dispute matters such as how the company is financed, how it is managed, the policy for making dividend payments, the procedure to follow when transferring or valuing shares, and procedures to deal with deadlock situations.
Key clauses that you might come across are:
- Good and bad leaver clauses - Setting out when a shareholder, often an employee shareholder, is required to transfer their shares back to the company or their fellow shareholders and for what value too.
- Drag along - ensuring that if the majority of the shareholders want to sell, the minority cannot block the transaction from proceeding.
- Tag along - Ensuring that minority shareholders are not left out of a sale of the business where there will be a change of major ownership.
- Dispute resolution clause - Setting out the procedure to deal with shareholder disputes and deadlock situations.
- Deadlock mechanism - if there is utter deadlock, mechanisms to release the stalemate such as the dissenting shareholder having to sell their shares to the majority shareholders.
- Good faith clauses - To ensure shareholders act in good faith towards one another for the benefit of the shareholders.
- Restrictive covenants - To protect the value of the shareholders’ shares.
What is unfair prejudice?
If you, as a minority shareholder, feel that the majority shareholder is acting in a way that benefits only them, at a detriment to you and/or your fellow minority shareholders, you may be able to make an unfair prejudice petition to the court for the purchase of your shares, or the winding up of the business.
Requirements for satisfying the criteria for unfair prejudice are set out in section 994 of the Companies Act.
What options do we have to resolve a shareholders dispute?
Depending on the mentality of the parties involved, resolving a shareholder dispute could involve:
- A shareholder departing the company with the other shareholders, or the company buying back the shares belonging to that shareholder;
- Splitting the business to enable shareholders to go their separate ways;
- Winding up the business;
- Negotiation or mediation; or
- Unfair prejudice petition or winding up petition