Where the board and shareholder base is split evenly – 50:50 – shareholder deadlock arises and the business stands still. We work to find a strategy to resolve shareholder deadlocks so the parties can move on. We have a the depth of expertise you will need and apply that to achieve results.
Please do call us to discuss your position. We will provide initial thoughts and an indication of likely legal costs.
Reasons to work with us to resolve a shareholder deadlock
We are specialist solicitors for the resolution of shareholder deadlocks in private companies.
- We have resolved a great many cases in our time. We handle difficult personalities in stressful situations. We deal with director/shareholders who are no longer contributing to the business for a variety of reasons.
- We have the experience of having acted for companies, directors and shareholders – we know the landscape and can handle the tax aspects along with the commercial aspects. We assess proportionality.
- Finally, but importantly, we are realistic.
Choices for deadlock shareholders to consider
The biggest issue to work around is that if the directors and shareholders are split 50:50 no decisions can be taken. In cases where there is no shareholders agreement and standard articles which have not been modified this causes a range of problems. The Companies Act is surprisingly deficient on regulation of shareholder deadlocks given that many small companies are deliberately set up with equal shares and 2 directors only.
Typical problem areas faced when there is a 50-50 deadlock
- 51% of shareholder votes are required to dismiss a director who does not leave voluntarily. So, the board is in stalemate.
- 51% of shareholder vote are needed to approve many transactions such as a transfer of shares. So, the shareholders are stuck.
- If the bank becomes aware of a shareholder dispute the bank can freeze the bank accounts. This creates a host of problems.
Resolving shareholder deadlock problems
Issuing a petition in court for the winding up of the company
A winding up petition brings about a cessation of its trade. A petition can be useful where the company is profitable and a shareholder wishes to exit with surplus funds returned as part of the winding up before the dispute escalates. Where there is a shareholder deadlock winding up will require the approval of the court. Like any court process evidence as to why the order should be made is crucial.
The downside of this route is that company goodwill is lost on liquidation.
Issuing a petition to force one shareholder to buy the other shareholder out
The courts have very wide powers when it comes to shareholder disputes. It is within the powers of the court to force a sale of shares. It is also within the powers to determine the value per share to be paid by the shareholder being forced to buy the shares. The court will consider evidence from independent experts or order that an expert is jointly appointed.
Generally speaking the court will not allow a discount for the minority interest.
De-merger or spin off between the shareholders
De-merging or splitting the business up can be the best solution where there is shareholder deadlock. This is more appropriate if the company has two distinct arms of trade, for example a property company that has a portfolio consisting of rental properties and development sites. One party may be keen to continue the rental arm and the other deal with development. Like any split, a valuation is crucial and we can help.
Unfair and prejudicial conduct
Unfair and prejudicial conduct claims can succeed where a shareholder embarks on conduct with the intent to damage the value of the company. Or where the other shareholder persistently refuses to vote a dividend in the hope that the aggrieved shareholder will be forced to exit on unfavourable terms.
If successful, the court will order a purchase order for the sale of the petitioner’s shares to the remaining shareholders or the company. There are a myriad of facts that can lead to a shareholder petitioning the court. We do advise on the prospects of success.
Buy back and cancellation of shares
If the company has sufficient cash a company share buy back can be used to deal with the transfer of shares in any shareholder deadlock situation once sale and the price per share is agreed.
More often than not, one party will argue that the company is a “quasi partnership”. This means that the company was incorporated on the basis that each party would have a say in management and thus decisions would be made collectively. If this argument runs successfully, then the price of a share is unlikely to include a minority discount. The commercial rationale behind this is that the shares entitle the holder to make certain decisions and thus have management input.
Making out the unfairly prejudicial conduct case
An aggrieved shareholder will likely be more able to evidence unfairly prejudicial conduct if he can establish a “quasi partnership”. The argument is likely to be that the aggrieved shareholder has been excluded from management or unable to discharge duties owed and this has been prejudicial.
Our commercial litigation experience enables us to anticipate likely claims and bat them off if possible at an early stage.
We are experienced in obtaining sensible outcomes in 50 50 shareholder disputes and have a proven track record in this area – get in touch to discuss how we can help.