Shareholder dispute cases
Very few of our cases end up in court as we find solutions and settle. We do not publish the names of the cases settled as discretion is something our clients can rely upon. However, in finding the solutions we work around the latest case law authority as that will be persuasive.
To provide a guide on how cases are being determined in court we have set out below some recent cases we have settled and recent leading decisions.
Minority shareholder pushed out by the others
We recently acted for a minority shareholder in a business. He was a founder of the business, with several others. Recently he had been side lined and it came to a head when he was called in by the managing director and told he was to be made redundant. He was made a low offer for his shares.
We argued that as a founder and quasi-partner, he was entitled to work in the business and they were not allowed to push him out. We obtained an independent valuation of his shares, showing that they were worth substantially more than he had been offered. The other shareholders were not willing to negotiate. We therefore fully prepared court proceedings ready for issue and sent them to the other share holders with a final request to mediate the dispute. In the face of this, the other shareholders agreed to a mediation. This was successful and we agreed a negotiated settlement which our client was happy with.
Breakup between two shareholders
We acted for one of two shareholders who had a minority stake in the company she had built up with the other shareholder over many years. After a dispute between the two, she was dismissed by the other shareholder. Attempts ate negotiation to agree a suitable valuation for our client’s shares failed and we issued High Court proceedings based on unfair prejudice as a shareholder. The other shareholder remained reluctant to settle and we continued to prepare for trial. Just a few weeks before trial, the other shareholder agreed to mediate. The mediation day – and much of the night – was successful and our client achieved a good price for his shares.
Leading cases on shareholder deadlock
Watercor Ltd, Re Also known as: Edgar v Munro Chancery Division (Companies Court) 18 July 2017
This case is authority for the fact that a shareholder can be forced to purchase the other shareholder’s shares in a 50:50 deadlock situation. It shows that the court has a very wide discretion in determining the value of the shares.
Facts behind the shareholder deadlock
The shareholders who were also directors had fallen out. One director shareholder was cut off the computer system for several years before the court heard the case but he did continue to receive a salary. That director claimed that the company was being conducted in a way which was unfairly prejudicial to its shareholders. The parties could not reach agreement so there was an application made to court to resolve the shareholder dispute.
Findings of the court
The court made a number of comments which can be helpful in resolving shareholder deadlocks.
- One shareholder could be forced to buy out the other shareholder.
- There was to be no discount to the price paid per share for minority shareholdings.
- In looking at the valuation of shares in private companies evidence of trading activity after the agreed valuation date could be taken into account. The court found that in the real world a purchaser and seller of shares might well have agreed upon a formula which took account of the performance of the business for a period post sale.
- The salary paid once one director had left the business for five years was not to be set off against the value of the shares. The court felt that the remaining director had decided to pay the salary for his own reasons. The court noted that there was no suggestion of the director forced out being in breach of his duties.
Private company valuation principles
The court held that the framework of the Companies Act conferred a very wide discretion on the court to do what was considered fair and equitable in all the circumstances of the case. The objective of the court was to put right the unfair prejudice which the shareholder had suffered. The Court was not rigidly restricted to making an order for a purchase at a market price to be arrived at only by ordinary valuation principles.
Shareholder dispute over interpretation of the Articles
This case is authority for the fact that the valuation is performed on a whole company basis rather than the price per share which might be achieved for a minority shareholding if a discount for lack of control was factored in.
Cosmetic Warriors Ltd v Gerrie – 05 May 2017
The company was owned by eight shareholders, all of whom were involved in the management of the companies. Control of the companies was finely balanced. The articles restricted the right of shareholders to sell their shares and granted pre-emption rights to other shareholders at a “prescribed price” which, in default of agreement, would be determined by independent accountants on a going concern basis. A dispute arose concerning the valuation. The company issued proceedings seeking determination on the correct basis of valuation.
Findings of the court
- The minority shareholders were successful. The price per share was held not to take account of any discount for the small shareholdings.
- There was no presumption in favour of a construction which put a realistic value on the shareholding. There was no presumption one way or another. It was far from obvious that valuation of the shares to be transferred would accord with business common sense. This is particularly in the case of a private company with few members where the relationship between the key shareholders was one of quasi-partnership. The parties might well have intended the valuation to reflect the value of the seller’s proportional stake in the business as a whole, regardless of the size of his shareholding.
- There was no substitute for looking at the language actually used to ascertain what the parties intended. A reference to a going concern meant the whole company.