Shareholder dispute: a swift solution

  • Posted

Gannons used procedural errors occurring in a shareholder dispute to our clients advantage, and resolve the dispute by restoring his control.

In order to avoid a shareholder dispute when shares are transferred, then then a particular process must be followed. If the correct process is not followed, then problems establishing the particular ownership of shareholders can arise. This can cause difficulties. The solution to a shareholder dispute often requires legal action.

Background to the shareholder dispute

The company had two shareholders, a brother owning 60%, who was our client, and his sister owning 40%. His sister also managed the company. 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’s sister had transferred some of his shares to her husband. This was key to the shareholder dispute as she had made the transfer without his knowledge or consent.

Shareholder dispute resolution – the key issues

Our client was a director of the company. His 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. However, he was unwilling to allow her actions to 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. However, the solutions we were able to find were potentially more limited by the lack of such documentation.

The steps taken to resolve the shareholder dispute

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

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 to resolve a shareholder dispute out of court. In an attempt to secure a swift resolution to the shareholder dispute we asked for undertakings. We demanded firstly that the husband confirm he was not a shareholder. Secondly we demanded that our client’s sister could not sell the premises without consent from our client.

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

Obtaining a declaration from the court 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.

Terms of the declaration

The declaration firstly stated that the company’s share capital was split 40% to our client, and 60% to the sister. Secondly that the husband was not, on the basis of the facts presented, a shareholder of the company. Finally that 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 indicated 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: Initially that our client would remain a 40% shareholder of the company. The sister would remain a 60% shareholder of the company. Then 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. 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. Finally 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. He is also a qualified mediator. Please do not hesitate to get in touch with John if we can be of assistance.

  • Much credit is due to Gannons for resolving this issue whilst keeping everyone on good terms