The role of a shareholder dispute solicitor is vital in resolving complex disputes between shareholders, which can often carry significant financial and legal implications.
Whether you are the shareholder taking action or you’ve had action taken against you, experienced shareholder dispute solicitors can advise you on the steps to reduce the risk and find the best resolution for you and your business.
Navigating Shareholder Disputes with Expert Solicitors
Shareholder disputes refer to disagreements that can occur between any shareholders, whether majority shareholders or minority shareholders. These are often borne out of different perspectives on how the business should be steered, but can also be for a range of other factors relating to the shareholders’ agreement.
To handle these conflicts with clarity, specialised shareholder dispute lawyers can help guide you by devising a plan that protects your rights according to existing laws and regulations.
Customised Legal Strategies
The role of a shareholder dispute solicitor can change depending on whether you are the one taking action against another shareholder or if someone is taking action against you.
Taking Action Against Another Shareholder
If you're taking action, your solicitor will work closely with you to understand the problem and your goals. They will gather evidence, build a strong case and possibly try to negotiate with the other shareholder. They'll be focused on asserting your rights and getting the result you want, whether that's compensation, a change in how the business is run or trying to remove the other shareholder.
Defending Against an Action Taken Against You
If you're the one being accused of something, the solicitor's approach will be more about defending you. They'll still gather evidence, but this time it will be to show that you didn't do anything wrong or that the other party's claims are exaggerated. They might also try to negotiate to find a solution that keeps everyone happy without going to court.
Protecting Shareholder Rights
Shareholders are usually entitled to vote on major decisions such as the appointment of the company’s directors. They may also inspect company records, transfer their ownership by selling their shares and participate in the success of the company by receiving any dividend declared by the company’s directors.
A shareholders’ agreement is beneficial for managing shareholder relationships while providing a roadmap for dispute resolution if necessary.
A solicitor can advise on whether directors have compiled with their fiduciary duties to the company. They can also advise on whether anyone else has complied with their own legal obligations according to both the articles of association and the shareholders’ agreement. Your solicitor will be able to explain whether your legal rights as a shareholder may have been breached, and if so, how.
Identifying the Dispute
Some of the most common types of shareholder dispute include:
Breach of Fiduciary Duty
Breach of the Duty of Care
Breach of Shareholders’ Agreement
Disagreements over Company Direction
Disputes over Strategic Decisions
Lack of Participation
Failure to Uphold Contractual Obligations
Types of Shareholder Disputes and Legal Remedies
Unfair Prejudice Claims
An unfair prejudice claim is more specifically referred to as an unfair prejudice petition. It arises when a shareholder believes that the company's affairs are being conducted in a manner unfairly prejudicial to the interests of some or all of the company's shareholders, also known as the company’s members.
An example of this might be when a majority shareholder takes actions that favour their own interests to the detriment of minority shareholders. A classic case might involve the allotment (i.e. creation) of shares, which has the effect of diluting the value of the shares owned by existing shareholders.
If the court finds the conduct to be unfairly prejudicial, it has wide discretion in granting relief, such as ordering the purchase of the aggrieved shareholder's shares at a fair value or regulating the company's future conduct.
A shareholder dispute solicitor would be invaluable in preparing and presenting such an unfair prejudice petition.
A derivative action is a legal claim brought by a shareholder on behalf of the company, rather than on their own behalf. This typically occurs when the company itself fails to take action against a wrongful act or omission committed by its directors, such as negligence, breach of duty or breach of trust.
For example, if the directors of a company were found to be using company funds for personal expenses and the company itself failed to take action, a shareholder might make a derivative claim. The claim would be for the benefit of the company and aim to recover the misused funds.
The solution to such a dispute involves the shareholder seeking permission from the court to proceed with the derivative claim, as set out in Part 11 of the Companies Act 2006. This process requires careful adherence to legal procedures and substantive evidence supporting the claim.
Just and Equitable Winding Up
Just and equitable winding up is a process through which a shareholder can petition the court to wind up a company on the grounds that it is just and equitable to do so.
This remedy is often sought when relationships between the shareholders have irretrievably broken down to such an extent that the company cannot continue to operate. This is particularly likely to be a solution where there is a dispute between equal shareholders who each own 50% of the company.
An example might be a deadlock in management where two equal shareholders are unable to agree on fundamental decisions, causing a paralysis in the company's operations.
If the court agrees that winding up the company is the just and equitable course of action, it can order the company to be wound up and so ending its existence. This process involves sale of the company's assets and distribution of the proceeds among its creditors and shareholders according to their respective debts owed and shareholdings.
Breach of Shareholders' Agreement
A shareholders' agreement is a contract between the shareholders of a company that sets out their rights, obligations and how the company will operate. A breach of this agreement occurs when one or more parties to the agreement fails to comply with its terms.
For example, a shareholders' agreement might contain a provision requiring shareholders to offer their shares to existing shareholders before selling to an external party. If a shareholder bypasses this requirement and sells their shares directly to an outsider, this would constitute a breach of the shareholders' agreement.
The solution to such a dispute often depends on the specific terms of the shareholders' agreement, including any dispute resolution mechanisms it may contain. Parties might first seek to resolve the dispute through negotiation or mediation, in accordance with the agreement. If these methods fail, they might escalate to litigation or arbitration, again depending on the agreement's provisions.
The court or arbitrator may award damages for the breach or grant an injunction to prevent further breaches, guided by the particularities of the contract and the nature of the breach.
Disputes Over Dividend Payments
Disputes over dividend payments occur when there is disagreement between shareholders or between shareholders and directors regarding the distribution of company profits as dividends. This could involve disputes over the amount, timing or method of distribution.
For instance, the company's directors might decide not to declare a dividend, despite the company having sufficient profits to do so. If no dividend is declared and the directors instead decide to pay themselves significantly higher salaries, contrary to the company’s dividend policy, it may lead to a dispute.
The court may be called upon to determine whether the directors acted in accordance with their duties and the company's governing documents in deciding whether to declare a dividend. If the court finds that the directors acted in breach of their duties or the company’s governing documents, it may order that the directors pay a dividend or take some other specified action based on the specific circumstances of the case.
Resolving Shareholder Disputes through Alternative Dispute Resolution (ADR)
Alternative Dispute Resolution (ADR) techniques such as mediation and early neutral evaluation can be used to settle shareholder disputes without resorting to litigation.
These processes can be beneficial for shareholders and directors seeking a swift and cost-effective resolution, whilst seeking to preserve the commercial relationship between the parties.
The use of ADR processes such as mediation and early neutral evaluation can allow shareholders and directors to obtain a quick resolution to their dispute and at a reduced cost compared to traditional legal proceedings.
Mediation is a process that facilitates negotiation between disputing parties with the aim of reaching a voluntary and mutually agreeable settlement. Unlike a judge or arbitrator, a mediator does not have the authority to impose a decision on the parties. Instead, they help the parties to communicate effectively, explore their underlying interests and potentially generate creative solutions.
In the context of shareholder disputes, mediation can be an attractive option for several reasons. Shareholder relationships often have personal and emotional dimensions that can be better addressed in a private and informal setting. Mediation also offers confidentiality, allowing the parties to discuss their concerns without public exposure.
For example, if there is a dispute between shareholders over the strategic direction of the company, mediation can provide a neutral environment where the parties can explore their respective visions and values. By working collaboratively, they may identify common goals and agree on a way forward that accommodates everyone's interests.
Arbitration is a binding dispute resolution process in which the disputing parties agree to have one or more independent third-party arbitrators decide the outcome. Unlike mediation, where the parties retain control over the result, in arbitration the arbitrator or arbitration panel makes a decision that is usually final and legally enforceable.
In the context of shareholder disputes, arbitration can be a suitable option when the parties want a definitive resolution but prefer to avoid the publicity and potential delays of court litigation. Arbitration can be tailored to the specific needs of the dispute. The parties select the arbitrator and which set of procedural rules to apply.
For instance, in a dispute over the valuation of shares following a breach of a shareholders' agreement, the parties might agree to submit the dispute to an arbitrator with expertise in corporate finance. The arbitration process could be designed to efficiently handle the complex valuation issues and the resulting decision would be binding on the parties.
Early Neutral Evaluation
Early Neutral Evaluation can be an efficient form of alternative dispute resolution that provides an impartial assessment of the facts, evidence or legal merits from a third-party perspective. It can be used in early stages of shareholder disputes to quickly clarify issues surrounding the disagreement whilst giving both sides control over finding mutual solutions rather than a binding judgment. This can lead to a settlement of the dispute faster and cheaper than through court proceedings.
The Importance of Shareholders' Agreements
Shareholders' agreements are vital in preventing disputes among shareholders and defining each party’s obligations. A carefully drafted agreement mitigates the risk of misunderstandings by setting out everyone’s rights and responsibilities.
Within a shareholders' agreement, there are several essential elements which should be considered for the protection and benefit of all involved. These include quorum, decision-making protocols, share allotment, issue and transfer provisions, capital contributions, confidentiality, voting rights, financing arrangements, restrictions and dispute resolution mechanisms.
Customising a Shareholders’ Agreement
Tailoring a shareholders’ agreement to a company's unique needs is essential for clarity and harmony. Consideration of factors such as size, industry and the relationships between parties helps produce an agreement that precisely outlines responsibilities. By tailoring the shareholders’ agreement, potential disputes can be prevented and all involved can operate with confidence and peace of mind.
Choosing the Right Shareholder Dispute Solicitor
Selection of the right shareholder dispute solicitor requires evaluating qualifications, experience, reputation, communication skills and cost structure. The ideal solicitor should have a robust understanding of corporate law, including shareholder rights, fiduciary duty breaches, minority shareholder claims and shareholder agreements.
Expertise and Experience
An experienced solicitor specialising in shareholder disputes should be well-versed in negotiation, mediation and litigation to ensure effective resolution. With a knowledgeable advocate, parties can approach disputes with confidence, knowing that every effort will be made to protect their interests and achieve a favourable outcome.
Communication and Accessibility
Effective communication and accessibility are paramount in shareholder disputes. The chosen solicitor must communicate clearly with clients and other stakeholders and remain readily available to provide updates and answer questions.