Shareholder disputes

Shareholder disputes

We provide shareholders of private limited companies with strategic advice and representation when faced with issues involving the company, co-shareholders, or directors.

There are many circumstances where disputes can arise for example, over disagreements on the direction and goals of the company; issues over allocation of profits/dividends; breaches of fiduciary duties by directors; issues over dilution of shares; conflicts over the terms and interpretation of the Articles of Association or Shareholders’ Agreement (if any); minority shareholders being unfairly prejudiced; majority shareholders blocked by minority shareholders from implementing a particular course of action etc.

What is a shareholder?

Companies operate through its directors and shareholders.

In basic terms, the directors are responsible for the day-to-day management of the company and business decisions are made by the directors voting at board meetings.

Meanwhile, shareholders (also called ‘members’) own the company and vote on certain matters at ‘general meetings’ which may require shareholder approval. Generally, matters proposed at a general meeting will either require the passing of an ordinary resolution (requiring a simple majority) such as removing a director or increasing the authorised share capital, or a special resolution (requiring at least 75% of the votes) such as amending the Articles of Association or changing the company’s name.

A director can be, and often is, a shareholder too. However, it is important to understand that these are two very distinct roles; and each have separate rights and duties – which is often not properly understood or appreciated.

Why are shareholder disputes so damaging?

Shareholder disputes are typically complex not just in terms of the law but also because the dispute has likely caused a breakdown in the relationship between the parties who often have strong views and personalities. This can be very damaging for the business in relation to its management, performance, and reputation in the eyes of third parties. Further, disputes can become very costly for the parties concerned.

What rights do shareholders have?

Shareholder rights are derived from the Companies Act 2006 (“Act”), the Articles of Association and the Shareholders’ Agreement (if any).

Broadly speaking, a shareholder’s power to pass decisions at a general meeting is dependent on the number of shares held. With a majority vote (either jointly or by a sole majority shareholder), shareholders effectively control the company. This of course generally means that minority shareholders have less power and influence.

Nevertheless, the Act set out some basic rights that all shareholders have unless they have been specifically varied by the company’s Articles or any Shareholders’ Agreement – the keys ones being:-

1. Pre-emption rights over the allotment of shares. Any new shares issued by the company must be offered to the existing shareholders first. This right to first refusal aims to protect existing shareholders from dilution.
2. Shareholders have the right to receive notice of and vote at general meetings. A proxy can be appointed if a shareholder is otherwise unable to attend the meeting.
3. The right to inspect the statutory books and records, including financial statements, the register of members, the directors’ service contracts, and any minutes of general meetings.

What can minority shareholders do if they are unfairly treated?

A minority shareholder may seek relief from the Court if:

• The affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members, in their capacity as such (including at least himself); or
• An actual or proposed act or omission of the company is or would be so prejudicial.

Although the Court retains a general discretion to make any order it thinks fit, the typical reliefs include:

• Regulation over the conduct of the Company’s affairs in the future;
• A requirement for the Company to refrain from doing or continuing the act complained of, or to carry out an act that it had omitted;
• A requirement for the Company not to make any, or any specified, alterations in its articles without the leave of the court; and
• An order requiring the purchase of shares by other members or the Company itself and, in the case of the purchase by the Company itself, the reduction of the Company’s capital accordingly.

How can we help?

The type of issues we deal with in the content of shareholder disputes include:-

• Breaches of shareholder and/or investment agreements
• Breaches of director’s duties, including breach of fiduciary duties and for failing to act in the best interests of the company
• Bringing and defending claims by minority shareholders
• Bringing and defending unfair prejudice petitions
• Acting on behalf of shareholders to enforce their rights to purchase or sell shares
• Representing clients at mediation and other forms of alternative dispute resolution
• Derivative actions
• Winding up petitions
• Injunctions.

Our solicitors have extensive experience in resolving shareholder disputes professionally and commercially. We will work with you to advise on commercial solutions to resolve these disputes quickly and effectively.