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There is a wide array of common shareholder disputes, including:
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If a director breaches the terms set out in a shareholder agreement or articles of association, this can lead to a dispute. For example, if a director acts in bad faith, outside of their authority or makes a decision that fails to take the company’s best interests into account.
Every shareholder in a company has the right to be informed about the business’s financial affairs. Disputes may arise when majority shareholders make decisions without discussing them with minority shareholders (those who own less than 50% of a company).
When shareholders are locked in a disagreement over a specific issue or there is a clash of personalities, relationships can break down completely. Until matters are settled, it can be very difficult for those involved to run a business properly, unless external mediation is utilised.
If one shareholder is drawing more money from the business than the other shareholders, then this can often lead to a dispute. For instance, the largest shareholder might draw a higher proportion of dividends from the business than the other shareholders think is fair.
A dispute might also arise if a shareholder diverts clients towards another business that they own or control; this is known as a breach of fiduciary duty.
The rights of shareholders vary depending upon the percentage of a business they own and the type or classes of shares they own.
Shareholders’ basic rights are set out in the Companies Act 2006, and every shareholder has the following basic rights under the act:
Every shareholder has the right to be informed about any relevant meetings that are taking place, and they have the right to attend. If a shareholder cannot attend a meeting, they have the right to send a proxy in their place.
Shareholders normally have the right to vote on company matters, but this depends on whether they own voting shares.
Shareholders have the right to receive a copy of the company’s annual report and accounts upon request. Most businesses also issue shareholders with a copy of their share certificate, although there is no legal requirement for them to do so. However, a shareholder’s name must be listed in the business’s register of members to prove they are a shareholder.
Shareholders also have the right to see the company’s articles of association, which may set out any additional rights they have. In addition, they have the right to see the terms of directors’ service agreements, directors’ indemnity provisions, records of resolutions, and the minutes of general meetings.
If a business is wound up, shareholders have the right to receive a proportional share of the money. A shareholder’s rights to receive monies vary depending upon the classes of shares they own.
It’s important to note that no money can be distributed to shareholders until creditors have been paid.
Although shareholders’ basic rights are set out in the Companies Act 2006, these rights can be enhanced by a company’s articles of association and a shareholders’ agreement. Shareholders’ rights can never be less than those specified in the act.
Articles of association lay out how a business will be owned and run. A shareholders’ agreement builds on this by adding detail, such as:
A well-drafted shareholders’ agreement is specific and practical, which provides clarity and peace of mind for shareholders.
Shareholder disagreements can often be resolved using the company’s articles of association and shareholders’ agreements, as these provide the starting point for resolving a dispute. For example, there may be an agreed set of procedures that can be followed to manage the transfer of shares.
A share purchase agreement can also be drawn up, in which a deal’s structure, purchase prices, warranties, indemnities, and completion terms are all clearly laid out.
Disputes can also be resolved through mediation, where an independent mediator is brought in to help the parties involved reach an agreement themselves. If an agreement is reached, the terms can be incorporated into a legally binding settlement agreement or a waiver of claims.
Settling disputes through mediation is faster and less costly than court action, which should always be a last resort. However, if court action is necessary, we have the experience to act in your best interests.
When shareholder disputes arise, there are a range of solutions, including:
Our solicitors have years of experience in successfully resolving all types of shareholder disagreements. We can work sensitively with you to explore solutions and to reach a practical solution that protects your business.
If your business has a shareholders’ agreement, a dispute can be resolved more quickly. However, if not, we will advise you on options and work to address the issues. Get in touch today to discuss your options.
Our team of specialist lawyers are experts in their field. Be confident in their advice and decisions to help get the right outcome for you. Contact us today to see how we can help