Grounds for Dispute
Common reasons for shareholders' disputes and partnership disputes
Disputes between shareholders/partners arise for any number of reasons, but it is not uncommon for the following issues to cause tension:
- breach of directors’/partners' duties
- the business’s strategy & management
- dividend/profit share policies
- disparities between salaries
- separate business interests
- failure to provide financial, accounting and statutory information
- exclusion from meetings
- breaches of shareholders' agreements/ partnership agreements
The minority shareholders’/partners' perspective
If you are a minority shareholder, or hold a minority stake in a partnership, you may feel that your rights have been ignored. You may have been excluded from the management 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.
Majority shareholders and partners
As a majority shareholder, or the holder of a majority stake in a partnership, 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.
Minority Shareholders & Partners
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.
a. 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.
b. 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). There is a wide range of remedies but, in the majority of cases involving disputes 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.
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.
Wronged partners or quasi-partners
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.
b. 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.
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 business 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.
Majority Shareholders & Partners
a. 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, voting procedures and any shareholders' agreement or partnership deed. Otherwise the dispute between the shareholders can escalate and a dispute that could have been sorted out reasonably quickly becomes difficult.
b. Shareholder agreements and partnership deeds
Shareholder agreements and partnership agreements 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 Settlement Agreement and independent, impartial advice is key to the validity of such agreements.
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 shareholder in the name of the company (subject to the permission of the court).
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:
- 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.
Alternative Dispute Resolution
Litigation involving shareholders and partners can be expensive and time consuming. Seeking advice early on is essential to save cost and energy in the long run. It is therefore always advisable to consider negotiation at the outset. Even if there are personal differences, it may be possible to arrive at a settlement which satisfies all the parties and keeps the business alive without incurring the cost of litigation.
Even once legal proceedings have been commenced, it is still possible to settle out of court and it is generally advisable to keep settlement options open. We can help guide you on where to pitch settlement proposals and how best to frame those proposals to make an effective offer. We can also help you to consider proposals you receive and the implications of accepting or rejecting them.
Where there is a genuine desire to settle on both sides, mediation can help secure a deal. Equally, where you find you are at an impasse, mediation can help break the deadlock and set you on the path to settlement. A neutral person who is a trained mediator will help guide conflicting parties towards a mutually agreed compromise. Mediation is a far quicker and less expensive means of resolving disputes than litigation.
We have considerable mediation experience and a successful track record in bringing about a resolution of shareholder and partnership disputes through the use of mediation.
If all else fails?
It is not always possible to resolve disputes by negotiation or mediation and a trial may be unavoidable, in which case using experienced trial lawyers such as ourselves is essential.
When a shareholder is forced out or “wants out”, the value of his shareholding needs to be assessed. In order to do this, the company will have to be valued first. Early and appropriate legal advice is essential under these circumstances.
Minority shareholdings are generally sold at a discount to reflect the fact that ownership of the shares does not confer control of the company. This clearly works to the advantage of the majority shareholders. However, the position of the shareholder who may be regarded as a quasi-partner is less clear. It is often argued that there should be no discount applied to the value of the share of a quasi-partner shareholder. However, judicial thinking is turning against this (see Irvine & ors v Irvine & ors  EWHC 1875 (Ch)).
The approach of the courts
It is essential to work with lawyers and accountants who understand the process and the way in which litigation evolves.
The date of valuation is of critical importance and the court normally designates a date as the valuation date. The court will rely on expert evidence in determining the price for shares. The court can also make adjustments if the company has been devalued by inappropriate transactions. For example, it is possible that a director may have enriched himself at the expense of the company thereby reducing its value.
The expert valuer
a. The role of an expert valuer
An expert valuer is often appointed as a single joint expert to determine the “fair value” of a given shareholding.
b. The appointment of an expert valuer
It is important to identify potential experts who have the appropriate qualifications and experience of valuing companies and who have experience of acting as an expert witness in court proceedings. Independence is essential. Identifying potential experts should be done by the parties’ solicitors in conjunction with their clients.
c. The instruction to the expert
Careful consideration needs to be given to the drafting of the instruction to the expert and the instruction must fully identify the issues that the expert should take into consideration when preparing a valuation.
We have experience working with a wide range of expert valuers in a wide range of business sectors and will ensure we will select one with you who is the most appropriate for your needs.