Shareholder Disputes - Prevention is Better Than Cure

Disputes between the shareholders of a company are common, particularly in small firms. They usually take place when a shareholder believes that certain actions taken by the directors or by other shareholders of the company have been conducted in a way which is unfair and prejudicial to the shareholders’ interests in the company. Such disputes are often complex, costly and can have a huge impact upon the company in terms of time, productivity and finances, while potentially casting a shadow on the morale of the workforce.

A company is a separate legal entity, distinct from its directors and shareholders, but generally, it is the directors who are in control of the day to day operation and management of a company. This control should be exercised in accordance with the company’s Articles of Association and the duties placed upon directors as detailed in the Companies Act 2006, most notably to act in good faith and in the best interests of the company. A breach by a director of either the Articles of Association and/or the duties owed to the company under the Act, or according to common law, can give rise to a claim, either by the company or its shareholders.  

If they involve shareholders, these types of disputes are commonly referred to as minority shareholder claims and are normally brought under Section 994 of the Companies Act 2006, which provides statutory protection for wronged shareholders. However, in order to bring such a claim, the shareholder in question does not necessarily need to be a minority shareholder. Often, these types of claims are pursued by shareholders of equal standing who have a legitimate interest in participating in the management of the company.

What constitutes unfairly prejudicial conduct will depend on the facts of each case, however, it may include:

• Financial mismanagement, particularly in larger companies
• Disposal of company assets to the detriment of the shareholders
• Failure to consult or to provide information
• Misappropriation of the firm’s business or assets
• Failure to declare dividends and/or an unequal declaration of dividends; and
• Improper allocation of shares and rights issues

Generally, the wronged shareholder will complain that the conduct they are unhappy with has had a negative impact upon the value of their shareholding in the company. Irrespective of how prejudicial the actions of the other shareholder may be, relief will only be available under the law if the actions are found to be unfair. Without the element of ‘unfair prejudice’ being demonstrated an action will fail.

In smaller companies, shareholders are often directors too. At times, differences can arise about the future of the company and how it should be operated. So, often the issues relate to an action taken by one shareholder to exclude the other, either from participating in the management of the company, or from being involved in the company at all.

If a shareholder is successful in bringing such a claim the most common type of relief sought and granted is an order from the Court that the Defendant buys the wronged shareholders shares in the company for fair market value. That said, the Court has broad discretion when considering what type of relief it grants. As a last resort, if the relationship between shareholders has soured completely, this may include an order to wind up the company.

It is wise, when you are setting up your company, to do all you can to pre-empt and protect the company and its shareholders from potential issues in the future, rather than having to deal with them further down the line. Drafting a detailed Shareholders Agreement, under the careful guidance of a commercial law professional, can help with this.

A Shareholders Agreement is designed to regulate the relationship between the shareholders in relation to the company’s affairs and will the first thing an aggrieved shareholder will consider. It can be enforced in the same was as any other contract giving rise to a claim for damages. The detail of a Shareholders Agreement will normally confer additional rights for a shareholder over and above those contained within the Articles of Association, typically covering things like the ownership of shares, shareholder policies, consents and obligations, what will happen upon the death of a shareholder, how shares should be valued and paid out, and how things should proceed in the event of disputes.

The Shareholders Agreement and the Articles of Association will help you avoid issues, since everyone’s responsibilities and expectations will be laid out in black and white. However, In the event of any shareholder disputes, it is wise to seek advice from a solicitor with specific expertise in this area of law.

Andrew has built a reputation in the business community in both South and West Wales, and has experience in providing advice to a range of businesses; boasting a portfolio of clients who operate on a local, national and international level. Having developed a particular interest in sports law, Andrew also provides commercial advice to a number of notable high-level sports clubs and organisations both in Wales and in Europe.