Shareholder dispute: a swift solution

Shareholder dispute caused by attempt to transfer shares to wrest control of company

When shares are transferred, the correct procedures must be followed to avoid disputes over ownership. Failure to comply with the relevant requirements can create uncertainty over share ownership and lead to costly disputes. Legal advice can help establish the parties’ rights and identify an appropriate route to resolution.

Background to the shareholder dispute

The company had two shareholders: our client, who owned 60%, and his sister, who owned 40% and also managed the company. Without warning, his sister told him that he owned 40%, she owned 40%, and her husband owned 20%. She also informed him that the company’s premises were up for sale.

Our client’s sister had purported to transfer some of his shares to her husband without his knowledge or consent. This was central to the dispute.

Key issues for this shareholder dispute

Our client and his sister were both directors of the company, and his sister owed duties to the company. Our client wanted to protect the value of his shareholding without unnecessarily damaging his relationship with his sister.

There was no written director’s service agreement or shareholders’ agreement in place. Although this did not prevent us from finding a solution, the lack of written documentation potentially limited the options available.

The steps taken to resolve the shareholder dispute

We advised our client that the purported share transfer was unlawful and 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 no consideration was payable by the husband to our client.

We also identified a procedural issue: the sister had failed to file a confirmation statement at Companies House.

First attempt to settle the shareholder dispute

We sought to resolve the dispute without court proceedings by requesting undertakings. We asked the husband to confirm that he was not a shareholder and sought confirmation that our client’s sister would not sell the premises without our client’s consent.

Attempting to resolve the dispute before commencing proceedings also helped demonstrate that our client had acted reasonably. This could be relevant to the court’s decision on legal costs if the matter proceeded to a hearing.

Obtaining a declaration from the court

When no response was received, we took formal steps and petitioned the court for a declaration.

Terms of the declaration we sought from the court

We sought a declaration that the company’s share capital was held 60% by our client and 40% by his sister, and that the husband was not a shareholder on the facts presented. We also sought confirmation that our client remained a director, meaning that the decision to sell the company’s premises required both directors to vote in favour.

Using mediation as a form of shareholder dispute resolution

Following the court petition, the sister indicated that she wanted to resolve the dispute without further proceedings to save costs. We proposed appointing a joint mediator to hear both parties’ positions and help them reach an agreement.

Mediation offered a quicker and potentially less expensive alternative to continuing with court proceedings.

Shareholder dispute – mediation resolves dispute

The mediation was successful. The parties agreed that our client would remain a 40% shareholder and his sister would hold 60%. Within 12 months, the company would issue 5% of its share capital to the sister’s husband. This arrangement did not impose a tax charge on our client.

Following the share issue, the parties would enter into a shareholders’ agreement granting our client veto rights, including the right to prevent the sale of major company assets such as the premises. Our client would also have a right of first refusal on share transfers, allowing him to monitor the position and potentially increase his shareholding.

Final resolution to the shareholder dispute

As the court petition had been a necessary step towards resolving the dispute, we sought a contribution to our client’s legal costs. The mediator considered the request reasonable, and the sister eventually agreed to pay two-thirds of our client’s costs.

After the parties signed a written settlement agreement and payment was received, we withdrew the court petition.