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Shareholder Disputes

A shareholder dispute is a disagreement or conflict between shareholders of a company. This can occur when shareholders have different opinions on the management or direction of the company, or when there are disputes over the distribution of profits or ownership rights. Shareholder disputes can often lead to legal action, such as lawsuits or arbitration, and can have significant financial and reputational consequences for the company and its shareholders.

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What are the most common types of shareholder disputes?

There are many reasons for shareholder disagreements. Here are some examples:

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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.

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.

If one shareholder is drawing more money from the business than the other shareholders, then this can 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.

What are the legal rights of shareholders?

Shareholders’ rights are set out in the Companies Act 2006.

The rights of shareholders vary depending upon the percentage of a business they own and the type or classes of shares they own.

However, every shareholder has the following basic rights under the Act:

Every shareholder has the right to be informed that an annual general meeting or an extraordinary general meeting is 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, but this depends upon 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 have the right to see the company’s articles of association which may set out any additional rights they have. They can also 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 proportion of the money. A shareholder’s rights to receive monies vary depending upon the classes of shares they own.

No money can be distributed to shareholders until creditors have been paid.

If one shareholder is drawing more money from the business than the other shareholders, then this can 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.

Can shareholders have additional rights?

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:

  • Shareholders’ rights and duties
  • How the sale of shares will be regulated
  • Exactly how important decisions will be made.

A well-drafted shareholders’ agreement is specific and practical, which provides clarity and peace of mind for shareholders.

How can shareholder disagreements be resolved?

If a company has articles of association and a shareholders’ agreement, 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.

Disputes can be resolved through mediation. This is when an independent mediator helps the parties involved to 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.

A share purchase agreement can also be drawn up.

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.

What are the solutions to shareholder disputes?

When shareholder disputes arise, there are different solutions, including:

  • Buying back shares – The company buys back shares from the shareholder, increasing the stakes for the remaining shareholders, which can only usually happen if the majority of shareholders agree.
  • Dividing the company – The business is split or reorganised so shareholders can go their separate ways.
  • Deferred consideration – The company may agree to buy shares back from the shareholder at a fixed price but defer payment until there are funds available.
  • Variation of rights – This enables a shareholder to keep receiving an income from the company but to relinquish management control.

Why choose Davisons Law?

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.

Have any questions or need any help?

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

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