Grounds for Dispute

1 . Common Reasons for Shareholders Disputes

Disputes between shareholders arise for any number of reasons, but it is not uncommon for the following issues to cause tension:

breach of directors’ duties
the company’s strategy & management
dividend policies
disparities between salaries
separate business interests
failure to provide financial, accounting and statutory information
exclusion from meetings
breaches of shareholders agreements/ partnership deeds

2 . The minority shareholders’ perspective

If you are a minority shareholder you may feel that your rights have been ignored. You may have been excluded from the managment of the business, or perhaps a dispute has arisen because you have not received your entitlement to profit share or dividends, or you may be concerned that a partner (or the other shareholders) are operating contrary to your interests or against your wishes. We can help you resolve such disputes.

3 . Majority shareholders and partners

As a majority shareholder, you may be faced with a dissident shareholder or partner who refuses to co-operate in the running of the business and who hampers the decision-making process and is causing inter-personal conflict. Again, we can help you resolve this situation.

Perspective: Minority Shareholders


1. Unfairly prejudiced shareholders

Generally speaking, a minority shareholder has little redress against the decisions of the majority, but under the Companies Act 2006 the court has a wide discretion to make such orders as it thinks fit in response to the application of any shareholder.


1a. Unfairly prejudicial conduct

Common examples of conduct that may amount to "unfairly prejudicial" conduct are:

exclusion from management in circumstances where there is a (legitimate) expectation of participation;
the diversion of business to another company in which the majority shareholder holds an interest;
the awarding by the majority shareholder to himself of excessive financial benefits; and
abuses of power and breaches of the company’s articles

If you believe you are suffering as a result of such matters please contact us as soon as possible as early action will improve the likelihood of a successful resolution.


1b. Court orders

If a court considers that there has been unfair prejudice, it has a general power to make any order it sees fit (under s. 994 Companies Act 2006 – formerly s.459 Companies Act 1985). There is a wide range of remedies but, in the majority of cases involving disuptes between shareholders, the court will order the purchase of the minority shares at a “fair value” (see Valuation) either by the other shareholders or by the company itself. In addition, the court has the power to wind up the company.


1c. Costs

An unfairly prejudiced shareholder should take courage from the fact that the company does not exist to fund the legal fees of majority shareholders. The court will, therefore, prevent any attempts to use company funds by the majority shareholders in defending claims arising from a dispute between the shareholders. The court can grant a restraining order if necessary to prevent this from happening. If the minority shareholder is successful, the respondent shareholders will be ordered to pay the minority’s costs of the proceedings.

2. Wronged partners or quasi partners


2a. Dissolution

As the wronged shareholder, you have the option of petitioning the court to wind up the company on the grounds that it is just and equitable to do so. In practice, this often occurs in small businesses consisting of, say, two or three partner-shareholders working together in a quasi-partnership. This is a remedy of last resort. Partners in a partnership or a Limited Liability Partnership (LLP) can also apply to the court for an order to dissolve the partnership.


2b. The Account

Sometimes, if agreement cannot be reached between the partners the partnership may have to be dissolved, so that both the assets and liabilities are crystallised


2c. Distribution

Once the liabilities have been paid from the partnership assets, the remaining assets may be distributed to each partner according to his interest in the practice and in accordance with any partnership agreements that might exist. If there are no such agreements, the courts can step in to assess the value of each partner’s partnership share by applying the provision of the Partnership Act 1890.

Perspective: Majority Shareholders and Partners


3. Dissidents


3a. How to deal with the dissident

The majority shareholders and partners must take great care to play everything by the book to avoid unnecessary claims against them. This means that they must continue to observe statutory rules governing the management of the company, provision of financial information and voting procedures. Otherwise the dispute between the shareholders can escalate and a dispute that could have been reasonably quickly sorted out becomes difficult.


3b. Shareholder agreements and partnership deeds

Shareholder agreements and partnership deeds generally make provisions for dispute resolution. Therefore, they should be consulted as a matter of course as soon as a dispute between shareholders arises. Arbitration will often be the prescribed method of dispute resolution.

If the dispute involves someone ceasing to be employed they should enter into a Compromise Agreement and independent, impartial advice is key to the validity of such agreements.

4. Derivative claims

Introduced by the Companies Act 2006, this provides a further weapon in the armoury of the shareholder. A derivative claim may be brought by a member of the company, i.e. a shareholder, in the name of the company (subject to the permission of the court)

4a. Causes of action that may be pursued as derivative claims

Under s.260(3) of the Companies Act 2006, a derivative claim can be brought for the following causes of action against a director of the company, or a third party:

Negligence
Default
Breach of duty or
Breach of trust

The Companies Act 2006 has put the common law directors’ duties on a statutory footing and introduced new duties. The new duties include the duty to promote the success of the company (s.172), the duty to avoid conflict of interest (s.175) and the duty not to accept benefits from third parties (s.176). A material breach is actionable as a derivative claim by a shareholder or a group of shareholders.