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Shareholders disputes

The two most common problems are: (1) the shareholders are in deadlock with no majority being formed (2) the minority shareholder feels that the Company is being run in an unfairly prejudicial way.

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Shareholders disputes

Where shareholders fail to put in place a Shareholders Agreement, shareholders who are in dispute commonly have to look at the legislation and case law governing Companies.  This leaves a disgruntled shareholder with limited options available.

Being commercial solicitors we are greatly experienced in dealing with shareholders disputes and our commercial litigators have an understanding that such disputes should not affect the goodwill of the business.

 

Shareholders in deadlock

Dealing with the first problem: deadlock.  This can easily occur where the shareholders cannot reach a decision – all have even voting rights and there is no majority shareholding to determine.   This ultimately means that either the disgruntled shareholder sells his shares or the Company is wound up.   The normal problems which occur if a shareholder wishes to sell and leave are (1) agreeing a value for the shareholding and (2) agreeing the payment terms.    Under the articles of association of the Company it is quite likely that it will stipulate that the Company’s accountant will value the shares at fair market value based on a willing seller/willing buyer principle.  The problem which can arise is if the valuation does not necessarily accord with the selling shareholders’ thoughts and therefore a second valuation is carried out.   A further problem is that even if the share price can be agreed, few shareholders can buy each other out with a lump sum payment – often payment is spread over equal installments.    This can only work however if one party agrees to sell – often the issue is that neither party wants to sell and buy doing so the Company continues to trade without any decisions being made.

There are two ways in which a Shareholders Agreement could solve this and they are appropriately known as “Russian Roulette” or “Texas Shoot Out”.  Under the Russian Roulette scheme, once there is deadlock any shareholder may serve notice on the other either requiring the other shareholder to purchase all its shares or requiring the other party to sell.  There is a period to accept the offer.   Under the Texas Shoot Out scheme, a shareholder may serve notice on the other side stating that he is willing to buy the other shareholder out and at what price.  The other shareholder then has a set period of time to accept the offer or make a counter-offer at a higher price.  This can sometimes lead to a sealed-bid.

Ultimately however if neither party can agree to buy the other out and the relationships of the parties have irretrievably broken down, then the simplest way forward could be for the Company to be wound up and the assets sold.

Winding up the Company can be achieved by agreement and the parties could look to place the company into a members’ voluntary liquidation. However, where the parties cannot agree to wind the Company up a minority shareholder can apply for a “just and equitable winding up” of the Company under the insolvency legislation.   This is often viewed by a disgruntled shareholder as a last resort as winding up a Company will mean the loss of jobs for its employees.

Unfair prejudice to minority shareholder

Where a shareholder feels that the Company is being conducted in a manner which is unfairly prejudicial to him he may bring a claim under section 994 of the Companies Act 2006 which is a court involved procedure and is therefore somewhat subjective in its nature as each court case is decided on its particular facts.   Section 994 states that “A member of a company may apply to the Court by petition for an order…… on the ground (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”   There are therefore two elements to the requirement and both must be present to succeed:

  1. The conduct must be prejudicial or harmful to the shareholders
  2. It must be unfair.

Meeting these two elements is complicated and expensive and the most common remedy provided by the Court is to order that the disgruntled shareholders’ shares are purchased by the majority shareholder.

At Ironmonger Curtis LLP our commercial litigation solicitors have much experience regarding shareholder disputes. Please email info@ironmongercurtis.com or call 08452252635 for more information.

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