Shareholder dispute: a swift solution

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Shareholder dispute: a swift solution

There is a process to be followed where shares are transferred if a shareholder dispute is to be avoided. If the correct process is not followed the problem is establishing ownership by shareholders. This can be difficult. The solution to a shareholder dispute often requires legal action to resolve. 

In this case, we used the procedural errors to our shareholder client’s advantage to resolve the shareholder dispute by giving our client control.

Background to the shareholder dispute

The company had two shareholders, a brother owning 60%, who was our client, and his sister owning 40%. The company was managed by his sister. Out of the blue, his sister told him he owned 40%, she owned 40%, and her husband, 20%. She also told him the company’s premises were up for sale.

Our client was informed that his shares had been transferred to the sister’s husband. This was key to the shareholder dispute as the transfer had been made without his knowledge or consent.

Shareholder dispute resolution – the key issues

Our client was a director of the company. The sister was also a director, and owed duties to the company. Our client wanted to know what he could do. He did not want to fall out with his sister any more than was necessary, but would not let her actions damage the value of his shareholding.

A problem was that there was no written director’s service agreement in place nor was there a shareholders’ agreement. The lack of written documentation did not prevent us from finding a solution. But the solutions available were potentially more limited than may have been the case if there was written documentation.

The steps taken to resolve the shareholder dispute

We advised our client that his sister’s actions were not only illegal, but also invalid. The supposed share transfer was void.

The company’s articles gave each director the right to refuse to register a share transfer. Our client had not signed a stock transfer form, and there was no consideration payable by the husband to our client.

A procedural error was that the sister had failed to file a confirmation statement, (previously known as the annual return) at Companies House.

First attempt to settle the shareholder dispute

It is always best advice to resolve shareholder disputes outside of court. In an attempt to secure a swift resolution to the shareholder dispute we asked for undertakings. The undertakings we offered were that the husband confirmed he was not a shareholder and the premises could not be sold without consent from our client.

The courts do want to see evidence of attempts to resolve the shareholder dispute. Our attempt was reasonable. Being reasonable we were confident that if the matter did proceed to court it was likely that the sister and her husband would be ordered to pay our client’s legal costs.

Using the court system as leverage to resolve the shareholder dispute

We received no response to the request for an undertaking. So, the next step was to take more formal steps. We petitioned the court for a declaration that:

  1. The company’s share capital was split 40% to our client, and 60% to the sister.
  2. The husband was not, on the basis of the facts presented, a shareholder of the company.
  3. Our client remained a director of the company, so the decision to sell the company’s premises required both directors to vote in favour.

Using mediation as a form of shareholder dispute resolution

After we had petitioned the court, the sister did indicate that she wanted to resolve the shareholder dispute outside of court to save on costs. We suggested that we instruct a joint mediator. The mediator would hear both parties’ case and work to find resolution to the shareholder dispute.

Mediation also proved an attractive alternative to the court process. Instructing a mediator is swifter and cheaper than a court case.

Shareholder dispute – mediation resolving the issue

The mediation was successful. The following terms were agreed:

  1. Our client would remain a 40% shareholder of the company. The sister would remain a 60% shareholder of the company.
  2. Within 12 months of the agreement, the company would issue 5% of the company’s share capital to the sister’s husband. This did not impose any tax charge on our client.
  3. Once the shares had been issued to the husband, the parties would enter into a shareholders’ agreement that gave our client veto rights. One of those being the right to prevent a sale of any major company asset, e.g. the premises.
  4. That our client had the right of first refusal on any share transfer, so he could monitor the position and increase his shareholding.

Final resolution to the shareholder dispute

Given that the court petition was a necessary step to resolve the dispute, we asked for a contribution to our client’s legal costs. The mediator saw that request as reasonable, and the sister eventually agreed to pay two-thirds of our client’s costs. Upon signing a written settlement agreement and receiving payment, we withdrew the court petition.

John Deane is a partner in the commercial team at Gannons. John acts for shareholders and companies involved in disputes. John is also a qualified mediator. Please do not hesitate to get in touch with John if we can be of assistance.