Shareholder disputes – Key challenges and approaches to resolution

Shareholder disputes – Key challenges and approaches to resolution

Shareholder disputes often occur when disagreements or conflicts emerge between shareholders. Given their potential to disrupt day to day business operations, these disputes require careful navigation and resolution.

What is a Shareholder Agreement?
A shareholders’ agreement is a privy contract between the shareholders of a company (and often the company itself) which outlines the shareholder’s rights, obligations and the company’s management. It provides a framework for how the company is run, covers issues not detailed in the public Articles of Association, regulates how shares are transferred and provides information on how shareholder interests will be protected and their relationships regulated.

Although there is no legal obligation for a company to have a shareholders agreement in place, not having one may lead to unnecessary confusion, costly legal action and major disruption to the company.

The importance of a Shareholders’ Agreements

• Clarity - By clearly setting out the expectations at the outset, a shareholders’ agreement can ultimately help to prevent disputes between shareholders in the long run. Even with the best intentions, the day-to-day management of a business can often escalate into business disputes which can be time-consuming, expensive and reputationally damaging for a business.

• Governs the management of the company – A shareholders’ agreement clarifies how major company decisions are made, often requiring unanimous shareholder approval for key matters. This ensures shareholders have input on important management issues and establishes clear limits on the board of directors’ authority.

• Protection of minority shareholders – Shareholder agreements can safeguard minority shareholders by, for instance, requiring unanimous consent for specific actions or granting minority shareholders a contractual right to block certain decisions.

• Protection of majority shareholders – Shareholder agreements can also safeguard majority shareholders by allowing them to force minority shareholders to join in the sale of a company if an offer is received for the entire share capital of the company.

What protection does a company have with no Shareholders’ Agreement in place?
In the absence of a valid shareholders’ agreement, the company’s Articles of Association shall be used to determine governance and operation, in conjunction with legislative regulation, such as the Companies Act 2006.

A company must comply with its own Articles by law, while a shareholders’ agreement imposes contractual obligations on the parties involved. If one party breaches the agreement, the other parties are entitled to take legal action against the individual who did not comply.

If a conflict occurs between shareholders and there is no shareholders’ agreement in place and the Articles of Association do not provide a clear-cut resolution, then mediation, arbitration and/or court proceedings may be required to resolve the issue.

How can a Shareholders’ Agreement assist in shareholder disputes?
A well-drafted shareholders agreement offers a cost-effective way to reduce the risk of a shareholder dispute arising by establishing a clear framework and procedures for decision making and dispute resolution. However, from time to time, disputes may escalate, and having a shareholders’ agreement in place may assist in the following ways:

1. Dispute resolution procedures – most agreements include a clause that mandates the use of Alternative Dispute Resolution (ADR) methods, such as mediation or arbitration, before resorting to court litigation. This keeps matters private, less confrontational, and often saves time and money, compared to litigation.

2. Deadlock provisions - Disagreements among shareholders and directors on important issues can lead to deadlock, potentially halting business operations. Including a deadlock provision in a shareholders’ agreement helps resolve such disputes efficiently, as handling them through the Articles of Association is often challenging.

3. Contractual remedies - As a legally binding contract, a breach of the agreement allows the innocent party to seek standard contractual remedies. These can include claiming damages for losses suffered, an injunction to prevent a breach, or an order for specific performance of the contract's terms.

4. Evidence of the Company’s best interests – a clearly drafted shareholders’ agreement can provide evidence of the agreed intentions and operations of the business, helping the court in exercising its discretion.

Overall, it is highly recommended for businesses to have a shareholders’ agreement in place to provide clarity, prevent disputes, and protect all parties by formally outlining each shareholder's rights, responsibilities, and exit strategies. Without one, disagreements over decision-making, finances, or share transfers can become costly and difficult to resolve, potentially harming the company. Due to the complexities that can occur without a well-defined shareholders’ agreement in place, obtaining professional advice at an early stage is prudent.

How we can help
Our specialist commercial litigation team has considerable experience in dealing with shareholder disputes and we understand the risks that can arise from this sort of dispute and that the form, costs and timing of a resolution is key. Our team provides clear, practical advice, tailored to your situation, helping you weigh the risks, assess the damage, and choose the right course of action. Please get in touch today to discuss how we can assist, or call 0191 232 8345.