Minority shareholder problems recently resolved
The vast majority of our matters settle without the need for court action.
The vast majority of our matters settle without the need for court action. We achieve results by negotiation and sometimes mediation which is usually the best outcome. Having said that, sometimes, in order to achieve results we do threaten action and issue claims on behalf of shareholders.
We find that the reason why we are instructed to resolve shareholder problems is because of our reputation for being specialists in acting for private companies and our understanding of how businesses hang together in the real world.
To help you decide if we are the right law firm for you we have put together some recent examples of our work.
Use of winding up action to protect minority shareholder
- Acting for a minority shareholder seeking to wind up a digital media company following a breakdown in management/deadlock. We presented the petition for the company’s winding up and then successfully resolved the dispute, using the petition as leverage for successful negotiations.
Shareholder agreement review for a minority shareholder
- Review of the articles and shareholders’ agreement before a shareholder invested to acquire a 10% stake. Making suggestions to lessen the risks attaching to the shareholding. Risk reduction included securing protections via the use of the right to veto key decisions such as substantial expenditure, sale or winding up of the business. Rights given to shareholders to see the management accounts are not automatic but we made sure that our client could ask for regular management accounts to keep track of what was going on.
Protecting minority shareholders under crowd funding
- Drafting new articles and a shareholders’ agreement for a business wishing to attract a number of small minority investors via crowd funding.
- Enhancing the rights for investors whilst complying with the EIS legislation which prevents a preference being given to investors. Building in control via rights to appoint directors and voting rights. Placing limits on the running of the business via veto rights on salaries paid to the team and restricted use of dividends.
- Review of the intellectual property created by the founders to make sure that all rights were transferred to the company. Drafting irrevocable deeds of assignment to transfer the intellectual property.
Resolving dispute over payment of dividends to minority shareholder
- We acted for a group of minority shareholders who complained about the lack of dividends. The company did have sufficient distributable reserves to pay a dividend. The majority shareholder thought he could force the minority shareholders to sell their shares by not paying a dividend.
- The majority shareholder controlled the board of directors. This meant that resolutions to pay a dividend were not being proposed. We made the board aware of the concerns from the minority shareholders which were ignored. So, we used the power of minority shareholder combined to call a shareholders meeting to approve that a dividend be paid. We also threatened to bring a claim for unfair prejudicial treatment of the minority shareholders.
- This forced the majority shareholder to consider his position. The end result was that the minority shareholders received a large dividend payment and agreement was reached by way of a shareholder resolution to pay regular dividends going forward if there were the profits on which to pay.
Negotiation of the price at which shares were transferred
- We worked with a minority shareholder who was an employee. The shareholder wanted to transfer his shares to other shareholders as he was leaving the business. There were no provisions in the articles or shareholders agreement for calculation of the value of the shares. The company was a private company and share values were not readily available.
- We applied our knowledge of the methods used to value unquoted shares. The outcome was to negotiate on behalf of the shareholder to achieve an agreed settlement which included a fair price for the shares transferred.
Resolving a dispute over the dilution of shares of a minority shareholder
- We were instructed by the minority shareholders of a children’s food manufacturer whose shareholding had been diluted from 7% to 2% over a 3 year period. The dilution would have had a significant impact on our clients’ investment as the majority shareholders were in the process of selling the company when the issue of dilution arose.
- Unless the articles of association of a company have dis-applied a shareholder’s right of first refusal (also known as a pre-emption right), any new shares that are being issued must first be offered to the existing shareholders in such proportions as to preserve their percentage shareholding in a company. This is to ensure that their investment is not diluted without first having the opportunity to invest further in a company to maintain their current shareholding. Under the articles of association of our clients’ company, the provisions in relation to the right of first refusal were ambiguous. We were successfully able to negotiate a financial settlement for our clients in connection with their diluted shareholding. There was also a review and new articles of association were adopted to protect our clients’ on-going investment.
- Whilst many businesses continue harmoniously, some businesses do not. Shareholder disputes are more common that one may think. We recently assisted an aggrieved shareholder whose business had suffered as a result of a criminal investigation into the other joint shareholder. Profits of the business had started to decline. The business was in deadlock. The only viable option was for the aggrieved shareholder to buy out the other shareholder.
- To push the matter along we issued proceedings in the High Court asking for an order that our client’s shares be bought out. Part way through proceedings an agreement for the transfer of shares was reached. We were able to act swiftly in drafting the relevant documents for the shares to be transferred. Ensuring that the matter was dealt with expeditiously meant the business could go back to what it was good at – being profitable!
I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.