- John Deane
- Updated: Sun, 18th Dec 2016
Litigation is very expensive and inherently uncertain, therefore you need lawyers who can think creatively to keep the costs down yet be effective – this is us. We formulate solutions to settle disputes which are proportionate. For those cases where litigation is the only option we have a strong team of specialist solicitors.
Our services in handling shareholder disputes include:
Negotiation of shareholder disputes
A shareholder dispute can arise in a number of ways but commonly they centre around allegations of failing to pull weight, manipulation, control, or business strategy.
A common complaint is that the company is being run for the benefit of only some of the shareholders. It may be that manipulation takes the form of finances being manipulated so that the company does not make a profit and therefore dividends are not paid. There are a myriad of other examples of how a shareholder dispute can emerge.
Whilst the majority of directors or shareholders will always have a higher degree of control, this does not mean that minority shareholders should be disregarded or left uninformed.
The directors rather than shareholders have day to day control over the company and where the directors also hold shares the duties overlap. Claims for a breach of a director duty in these situations may be a useful tactical option for an aggrieved shareholder seeking to acquire control or initiate an exit.
The chances are we will have dealt with a problem similar to yours. This means we can focus in and understand the cause of complaint to take the parties to a faster resolution.
A shareholders’ agreement can be a useful document which often avoids many disputes from becoming problematic. We can draft shareholders’ agreements which include provisions setting out a path to resolving disputes. This minimises costs.
Unfortunately, not all businesses have a shareholders’ agreement. In many cases the paperwork has been left in a drawer and not signed. Shareholders still have protection without a shareholder agreement but the avenues may be more limited.
Everything depends upon the facts.
We have dealt with many cases where the only document was the standard articles downloaded when the company was formed – we will know what to do in this situation.
Negotiate a shareholder agreement to resolve a shareholder dispute
It is entirely possible to use the opportunity to regularise issues between shareholders and to properly record the way the company should be run with a shareholders’ agreement. A shareholders’ agreement can relate to day to day matters of input into the business. A shareholder agreement can place restrictions on authority such as bank mandate, policy on dividends, what should happen in the event of future dispute and/or an exit mechanism.
Point of no return
Often we are involved with cases that have reached a point of no return, especially where one shareholder claims that funds have been siphoned off by the other already. In these cases the only solutions are resolution or or court action.
We set out some ideas for resolution – what is relevant will of course depend upon your specific situation and desired outcome.
External mediation – separate the people from the problem
Many shareholder disputes arise in situations where the shareholders are also directors and work in the business day to day. There may be a personality clash. If the business itself is viable, one option is to bring in external directors to run the company.
Many business owners do not like this idea and may also feel that an external director may be subject to attempts by the other shareholder to manipulate a new director but this option should be considered. If the matter proceeded to court you would need evidence of having put this idea forward.
Sale of shares or assets
Many disputes are solved by an agreement for a sale of shares, assets or a separation of the business. Workable solutions can include:
Sale of shares to other shareholders or a third party
Usually the articles require any share transfer to be approved by the directors. In many businesses operating under bespoke articles and shareholders agreements there will be permitted transfers and non-permitted transfers. It may be possible to negotiate around such restrictions.
A company buy back can be very attractive to remaining shareholders because their shareholdings are increased without incurring expenditure. The company buys the shares of a shareholder, usually using its distributable reserves.
Splitting the business
Assets can be transferred to new companies so that shareholders can go their separate ways. Spin offs and demergers can be structured to avoid immediate capital gains tax liabilities in certain circumstances. We can take you through the steps.
If the disgruntled shareholder can muster sufficient shareholder support he may be able to pass a resolution for the winding up of the company. The level of shareholder approval required will be a minimum of 75% of shareholders voting in favour or more if a higher level is included in the articles or shareholders agreement.
Valuation of shares in private companies
The value at which shares are sold or bought back can be a topic of hot debate. Valuation of shares in private companies is an art that will depend upon the appetite to settle. We can share experiences and can prepare valuations to support negotiations.
Independent valuation of the shares
Where the dispute is about share value an independent expert can be the solution. The terms of appointment will need to be thought about as there are no fixed rules. The instructions should ideally cover matters such as:
- The basis of valuation – will it be on a whole company basis or on the basis of the minority shareholding;
- The value to be attributed to goodwill;
- Who pays the costs – is it the company, the shareholders, or just one shareholder;
- Is the valuation binding;
- Are the parties allowed to make representations;
- It is to be assumed the business will continue as a going concern.
Letters of appointment for independent valuation
We work with shareholders to prepare letters of appointment for experts to help achieve the right outcome for you.
Where the company is owned and controlled by two directors who are also the shareholders and they fall out – the situation is referred to as deadlock. Deadlock means that the company is frozen as there is not the majority required to pass director resolutions nor shareholder resolutions. Shareholder deadlock is common. If it is not addressed, then the damage is irreparable.
Deadlocks are obviously bad for business. We often advise 50% shareholders on effective exit routes following a 50/50 shareholder dispute. The very nature of a 50/50 shareholder dispute requires specialist knowledge. In effect, the shareholders are the business, as well as the contributories, so will inevitably have their own agenda on various matters, i.e. clients and products.
50/50 shareholder exit routes
There are a variety of exit routes for a 50% shareholder to consider. Popular exits include:
- Agreeing a share buy back followed by termination of employment and or directorship – it is possible to agree staged payments.
- Agreeing a share purchase from the departing 50% shareholder and termination of employment and or directorship – funding has to be considered.
- Issuing a petition for the winding up of the company and a cessation of its trade, often where the company is profitable and the 50% shareholder wishes to exit with surplus funds returned before the dispute escalates.
- Demerger or spin off between the shareholders – splitting the business up can be the best solution.
- Applying to the court on the basis that the other shareholder’s conduct is both unfair and prejudicial to the other, often where the other shareholder embarks on conduct with the intent to damage the value of the company, or where the other shareholder persistently refuses to vote a dividend in the hope that the aggrieved shareholder will exit on unfavourable terms. There a myriad of facts that can lead to a shareholder petitioning the court. Some will be successful, we can advise.
50/50 shareholder dispute: considerations
There are various matters to be considered when negotiating an exit following a 50/50 shareholder dispute, including:
Often, but not always, one shareholder puts up funds and the other creates the company’s product. If the creator is departing, the value of the company will be affected. We are well experienced in preparing, and advising on, company valuations so as to protect your cash position.
It is important for the legal correspondence to run in two streams, one “off the record” and one “on the record”. This is to ensure that negotiations for the exit of an aggrieved shareholder can run simultaneously to any current or intended court application. We run settlement discussions in the background, with a view to minimising legal costs.
The importance of retaining evidence cannot be stressed enough. Given the shareholders will contact one another on a daily basis through the day to day running of the company, email, text, and phone records should be preserved so that any court application can be supported.
A “quasi-partnership” is the legal term for a private limited company being run as if it were a partnership between the two 50/50 shareholders, both having an equal say in decision making. Often, one will argue that the company is a “quasi-partnership” and the other will not – we know which arguments to run to give you leverage and increase the chances of a profitable exit.
We do initiate court action where negotiations are not progressing. We will always recommend attempts to settle are made before court action. Not only can this be most cost effective but if you cannot show a willingness to negotiate sensibly the court will not look favourably on your claim and you will be faced with a costs award against you. A cost award can be made even if you win the case.
We are equally as familiar with defence work as we are with bringing proceedings. There is a big emphasis on proportionality under the legal system. Our fees are very competitive and instructing a boutique firm like us can point towards proportionality.
Tactics in running shareholder litigation
Tactics come into play in the choice of claim and the style of defence. Analysis of the evidence is absolutely essential and will often dictate which type of claim is most suited. Similarly the defence needs to play to the evidence available.
Potential claims available in a shareholder dispute
The types of claims we can deal with include:
Declaration from the court
The court is able to give declarations on a whole host of applications. For example, the court can declare that the directors must follow a shareholder resolution. Alternatively, the court can declare that the shareholders obtain an independent valuation of shares for the purposes of agreeing a buy out from a shareholder. Suitable declarations will depend upon the nature of the shareholder dispute and the facts.
Minority shareholder unfair prejudice petition
The court can declare that actions proposed or not proposed (as the case may be) unfairly prejudice a minority shareholder. The outcome can be an order that the proposal is not implemented.
Winding up order
In cases of deadlock, often where there are two directors who are equal shareholders, the court can order a winding up of the business and distribution of assets.
Claims against directors
Claims can be brought against a director personally where it is alleged that the director is acting in breach of his duties.
What is the loss
In any court case the shareholder bringing the claim has to be able to show a loss. Quantification of this loss is an important element to assessing the strength of the case. If we are defending a claim we will scrutinise the damages aspect most carefully with a view to bringing the loss claimed down if possible.
Shareholder dispute track record
We work with majority shareholders, minority shareholders, or companies where the shareholding is split 50/50. Our approach will depend upon who controls the board and who controls the shareholding – we have experience in dealing with all types of situations. Our focus is on privately owned companies of differing stages of development operating across a range of market sectors.
Examples of our recent instructions include:
- Extracting a minority shareholder from a profitable telecommunications company using the buyback procedure following a breakdown in management. Our tax advice ensured that our client remained entitled to entrepreneurs’ relief.
- Using an unfair prejudice petition as leverage to negotiate a departure for our client, a minority shareholder in a mobile application development company, with uplift in the market value of our client’s shares due to a lucrative contract obtained pre-completion.
- Drafting a shareholders’ agreement where the majority shareholder suspected a minority shareholder who had a casting vote was about to sell to a competitor. We had the agreement signed before the other shareholder could proceed with the sale to protect the shareholder base.
- Successfully winding up a recruitment company on behalf of a 50/50 shareholder who sought to extract himself from the company with the ability to take clients and set up in competition following dissolution.
Our service covers all the aspects which can crop up – tactics, negotiation, valuation of shares, tax and litigation. We are specialists in dealing with private companies. We have successfully resolved many deadlock situations and have dealt with cases where there is little in the way of paperwork to rely on.
I have the experience and expertise to resolve your shareholder dispute, I have a reputation for being tactically astute. Why not call or email me now to arrange an informal discussion.