Shareholder Disputes

Our job is to find a solution to your shareholder dispute. We analyse the evidence, plan a strategy and then implement. The team includes tax expertise and specialists for the valuation of shares in private companies.

Please do call us to discuss your dispute. We scope cases and provide estimates for budgets.

Reasons to select us to resolve your shareholder dispute

We are a specialist solicitors for the resolution of shareholder disputes in private companies.  This  gives you the benefit of experience which we share:

  • We are familiar in dealing with the competing interests of directors and shareholders. We deal with director shareholders who do not work out, shareholders who are exiting the business on bad terms and share agreements which fall flat and end up as a shareholder dispute.
  • We have the knowledge to think of the best tactics and apply them.  Most of our cases are settled as we find a solution but in the appropriate case we have the skills to litigate.
  • We have a dedicated team and can respond quickly to problems.
Based on questions we see arising we have set out some guidance on how to solve shareholder disputes

Transferring shares to resolve the shareholder dispute

Some companies have set out an agreed exit path in their articles or shareholders’ agreement. You need to review the documents to see what your position is. In some cases there will be detailed provisions relating to:

  • When the shares can be sold;
  • How the shares will be valued on transfer;
  • Who the shares can be transferred to; and
  • What restrictions post sale are placed on the ex-shareholder.

We can take you through what the documents mean in your situation.

Managing shareholder disputes where there are no agreements

Unfortunately, not all businesses have detailed articles or a shareholders’ agreement covering the transfer of shares where there is a dispute.  In some cases the paperwork has been left in a drawer and not signed. In the absence of agreement there are usually four ways in which a shareholder in a private company can transfer shares.

Sale or transfer of shares

The directors can block the transfer of shares in most cases providing they can show that the discretion to do so has been exercised in good faith. A transfer means that the person acquiring the shares will have to fund the acquisition cost – this can be a problem.

Usually the articles require any share transfer to be approved by the directors.  Usually there has to be a majority vote meaning at least 51% of the directors will need to approve the transfer. In a shareholder dispute situation this does cause problems and force the shareholders into reaching an agreement to transfer.

Company buy back of shares and cancellation

The great advantage to a company buy back is that the acquisition cost is paid for by the company. The shares are cancelled meaning that all remaining shareholders receive an uplift in the size of their shareholdings. One potential draw back is the company has to have sufficient surplus cash to pay for the shares. The tax treatment of the proceeds in the hands of the seller also differs for a company buy back.

Another problem often found in a shareholder dispute situation is that 75% of shareholders have to approve the company buys back the shares.

Splitting the business

Businesses can be split up and re-organised to enable shareholders to go their separate ways.  There are many choices all of which depend upon the specific facts.

Winding up

If the business were sold as a going concern the price achieved by shareholders includes the goodwill. Often the main value of the business is its goodwill where it has a strong trading history but not much in the way of capital assets. The winding up petition requires 75% of shareholders to vote in favour. Therefore in many cases a solvent winding up is not attractive.

Insolvent winding up

If the company is insolvent it may have to be wound up and put into administration or liquidation. Pre-pack arrangements are a possibility where the business is bought from the administrators.

Risk to shareholders if company is insolvent

The administrator dealing with an insolvent winding up has to sell to the highest bidder. The risk is the shareholder may not be the highest bidder.

Ideas to help achieve settlement to a shareholder dispute

It may be that there are suggestions to put forward that will help the negotiations for a successful sale of shares. We can look at:

Put and call options

Put and call options can be helpful. This gives a shareholder the option to “put” his shares for sale on the other shareholders. A call option is the reverse – a shareholder can “call” for the shares of others to be sold. Value is often the sticking point but an independent valuation can provide the answer.

Leaver provisions

If the employment is terminated or a director is dismissed there may be compulsory transfer provisions in the articles or shareholders’ agreement. If there are no provisions a shareholder cannot be forced to sell his shares. There is a distinction between a good and bad leavers and this will have an affect on price. We may be able to agree that the shareholder is treated as a good leaver to secure a better transfer value for his shares.

Variation of rights

One shareholder may wish to relinquish management control but retain some income and capital rights. This will be particular to founders looking to step aside but retain some financial reward for their work. Shares can be varied so that certain rights are withdrawn.  There are often creative solutions.

Instalment payments for the share transfer

Where cash flow is an issue staggered payments for the shares transferred or bought back by the company could be attractive.  But care is needed as:

  • Staggered payments can if incorrectly structured affect a seller’s tax position particularly if the company is buyer;
  • The seller may look for security over the instalment payments which buyers are keen to avoid;
  • Interest rates may kick in if a default on instalment occurs; and
  • Earn outs are also common but a seller will need to think carefully where he is relinquishing full control and thus unable to control business direction.

Valuation of shares in private companies

The value at which shares are sold or bought back can be a topic of hot debate under a shareholder dispute. 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 under a shareholder dispute

Where the dispute is about the price payable for shares 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. 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.

Correspondence

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.

Evidence

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.

Resolving a shareholder dispute by court action

There may be scope to consider court action if negotiations for a shareholder to exit are not progressing. We will always recommend attempts to reach a deal before court action. This can this be the most cost effective solution.  And, if you cannot show a willingness to negotiate sensibly the court will not look favourably on your claim. You may be faced with an order to pay the other side’s legal costs.

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 competitive and instructing a boutique firm like us can point towards proportionality.

Potential claims available in a shareholder dispute

The types of claims we can deal with include:

Declaration from the court

The court can declare that the shareholders obtain an independent valuation of shares for the purposes of agreeing a buy out from a shareholder.

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 is usually that shareholders are ordered to buy out a shareholder who has suffered the unfair treatment. Alternatively, a company buy back of shares could be ordered by the court. The court can direct that the price for the share sale is determined by an independent expert so that there is fairness. The outcome is very fact specific.

We find that chances of settlement are greatest:

  • Pre action – when the parties are keen to avoid court;
  • During disclosure – when documents previously withheld have to be disclosed which can give the opposition new material.

Risk to the shareholder under an unfair prejudice petition

In bringing an unfair prejudice claim, the shareholder would have to front his own legal costs. If the claim is successful the court will usually order that the losing shareholder and or the company pays the winning shareholder(s) legal costs. However, the winner will never recover all of his legal costs. This again comes back to proportionality.

  • The team are quick, responsive, and highly practical. They addressed the problem immediately and put a halt to a nasty situation.

  • I never contemplated a dispute with my business partner. However, I needed advice when the relationship broke down. But I ended up in a good place.