Sometimes it is difficult to face the facts that things are not going well in a company. After all, many shareholders in small companies are friends and colleagues, or even family members. Often, there are no legal documents in place to help resolve disputes, and no formal mechanism identified that allows disputes to be resolved in a way everyone has agreed on.
Disputes can often escalate quickly within companies because Directors and shareholders do not get legal advice early on. Early advice and resolution is almost always preferable and less expensive than waiting until things “come to a head”.
Here are some of the common reasons we have been called in when shareholders of a company fall out:
A simple clash of personalities can also lead to a shareholder dispute. Directors sometimes fall out based on misunderstandings or lack of communication. However, these disputes can be just as damaging to a business as any other. We do not take these clashes lightly. Emotion is just as difficult to deal with as legal facts and obligations.
In law, any action taken by a shareholder director that devalues certain shareholding or is otherwise oppressive to other shareholders can possibly amount to unfair prejudice under the Companies Act 2006. However such claims are notoriously lengthy and expensive, as they begin immediately at the High Court level. Instead our goal is to help you resolve disputes in advance, and only head to court if absolutely necessary.
Many of our clients are small and medium-sized enterprises or family companies where relations have irretrievably broken down. We often manage to preserve the value of the ongoing business and find a resolution to such disputes through negotiation and mediation.
We will look at your objectives from the outset and devise a strategy so that those objectives will be achieved. Our job is to make sure companies and their directors and shareholders resolve their issues and protect their rights.
We are particularly proficient in bringing and defending unfair prejudice petitions if needed. In fact we recently successfully defended a spurious unfair prejudice application for a small business in both the High Court and Court of Appeal.
Firstly, we will check your shareholder agreements and articles of association and other documents. These often act as a good starting point to resolve any disagreements, in so far as they may at least lay down a mechanism for resolution.
If your company doesn’t have a shareholders agreement, then it is worth putting one in place. It is a document that covers many elements of potential conflict between shareholders.
It may be possible to call a meeting of either the board or shareholders. Sometimes at a general meeting sheer voting power or frank and open discussions can sort out any differences one way or another.
There may be specific ways to remove a director of a company and these may be mentioned in your shareholders agreement, director’s contract or other legal documents you may have. This area does need special legal advice as a director could make a claim for unfair dismissal if the process is undertaken incorrectly.
Always faster and less expensive than going to court, a trained solicitor can help with practical advice and suggest solutions. Being realistic about the outcome of any dispute will help keep things cordial and achieve a better outcome. However it is likely that all parties to the dispute will need to compromise something in order to achieve a settlement.
A solicitor will be able to put all the options on the table and explain the consequences and next steps to achieve the chosen outcome. Sometimes it may be possible and wise to terminate the Director’s employment and offer a settlement agreement. Compensation to the Director can be included tax free. However, how this is structured is important and requires legal advice to ensure it relates to non-contractual payments.
If a third-party independent mediator is required, we can also arrange this so that mediation can be neutral. Courts expect mediation to have taken place before a petition is raised, and so it is well-worth considering this route. Around 90% of mediation achieves a consensus. It is not about right or wrong (unlike a judge, the mediator does not rule on the case) but instead about helping the parties find a compromise.
It may be possible to find an external investor who wants to buy out the shares held by the disputing party. This can also involve various ways of selling and purchasing the shares, for example deferred payments and performance related payments. An existing shareholder is perhaps the most motivated buyer of shares. There may be arrangements in place for this to happen under the shareholders agreement or articles of association. If an offer to buy out the aggrieved shareholder is made, it often requires the buyer to have sufficient funds in place.
It may also be possible to use company funds to buy the shares of the party in dispute and then cancel them. This means the shares have to be valued, payment terms and non-compete clauses may come into play. There are Capital Gains Tax issues that may come into play and HMRC will need to be consulted.
One of the primary points of dispute is valuation of shares. Hewetts can arrange for a valuation consultant to ascertain how much a shareholder can expect to receive as part of any buy-out. However there are many methodologies for valuing shares, and disputes between expert valuers are quite common.
A “nuclear” option, but an option nonetheless. It could be there is a complete deadlock and no agreement can be found because relations have totally broken down. There could be mismanagement, for example, fraud. Or alternatively there could be an exclusion from management so that one director is effectively locked out of the company decision making process. The Company could potentially be wound up, or a petition made for a winding up order.
We have only touched on the intricacies of the law in this article. It will require analysis by a company and commercial solicitor in the first instance to help establish a clear route toward finding a solution to any shareholder or director dispute.
Please call Oliver Kew on 0118 957 5337 or email at firstname.lastname@example.org to get advice in the first instance.
Published on 11/12/2020