Partnership & Shareholder Disputes

Shareholder and partnership agreements – prevention is better than cure

For private companies, particularly ones with a relatively small number of shareholders who are involved in running and managing the business, it is important to have a shareholders’ agreement in place as this will help to reduce the likelihood of shareholder disputes.

Preparing such an agreement helps shareholders to work through some key issues which could give rise to potential disputes at a later date. It also encourages shareholders to work through possible future scenarios at the outset whilst relationships are still good.

Amongst other things, a good agreement will cover:

• the company’s key objectives
• what authority is required to take certain actions
• company financing
• dividends, directors’ payments and salaries
• responsibilities for different areas of the business

As far as possible, the agreement will anticipate potential issues and what should be done about them: such as what happens if the company needs to raise additional finance, it wants to take on new high value contracts or it needs to employ new, highly paid executives or employees. An agreement will usually set out that a majority of shareholders – or even all of them – will need to give their approval before the company can make the proposed changes.

A shareholder agreement will likely also cover how a shareholder can realise their investment in the company including: if there are any restrictions on selling their shares; how a shareholding will be valued; and if the other shareholders or the company have the right to buy the shares.

A shareholders’ agreement would usually be expected to provide a timetable for any share sale as well as allowing for the appointment of an independent third party to value the shares if a valuation cannot be agreed. This is particularly important where a shareholder’s exit from a company is not on amicable terms.

Agreements should also cover a list of events which would automatically trigger a requirement for the shareholder to offer to sell his or her shares to the other shareholders such as the death of a shareholder or the departure of a shareholding director.

All too often, however, these elements are not properly considered or an agreement is incorrectly drafted and, as a result, disputes arise; in addition to any issues or disputes that arise from the day to day operation of a company.

Common causes of disputes

There are many potential causes that can arise including:

• disagreements over strategy
• poor personal relationships, politics and power struggles
• a change in personal circumstances for any of the key players in the business
• dealings between the company and any private business owned by one of the directors
• other conflicts of interest
• board performance on its governance and legal responsibilities
• financial issues, including potential insolvency
• remuneration levels and benefits
• disproportionate contributions of money and/or time from each shareholder or partner
• the price to be paid when a shareholder or partner is bought out or forced to leave the business

The problems can be particularly acute where one shareholder, or group of shareholders – or partners – acting together, can override the wishes of a minority shareholder.

Disagreements between shareholders

In general, most disagreements between shareholders are eventually resolved by a voting majority. Protection is available, however, in certain circumstances, for minority shareholders where majority shareholders are abusing their position.

Where a board wants to dismiss a director they need the approval of shareholders. As such they would need to call a general meeting accordingly. A chairperson or managing director can be removed from their post by the other directors but the person concerned will still remain as a director of the business.

If the director is also an employee, the directors need to take care to ensure that the dismissal process respects their employment rights. Notably their notice period under their contract or as specified by law, along with their right not to be unfairly dismissed. Otherwise the director concerned may be entitled to claim compensation for breach of those rights.

Accordingly it is more usual for directors to be encouraged to resign rather than be forced out of post. Usually a compromise agreement will be drawn up covering the risk of any future claims as well as the director’s likely involvement in competing businesses.

Enforcing your rights as a shareholder, member or partner

There are various options, including:

• proposing a resolution at a general meeting or partnership meeting which redresses the situation
• mediation services to settle a dispute
• asking the board of directors to take action in the company’s name against an individual director (shareholders generally cannot sue in the company’s name)
• for any criminal acts, report or complain to the police
• applying to the court for an order that the company is acting or has acted unfairly (an ‘unfair prejudice’ action)
• applying to the courts for the company to be wound up
• suing the directors for negligence by means of a ‘derivative action’

If you do intend to take action then we recommend that you take legal advice at the outset on the best approach to adopt so that you have a good understanding of the likely outcome of any dispute, the chances of success and the timescales and costs that may be involved.

Every dispute has its own particular dynamics and circumstances. Accordingly we offer a free initial consultation – without any obligation on your part – to discuss your situation, understand what is involved and work out how best to advise and support you. This enables us to give you an idea of what may be involved; and, if possible an indication of what may be involved from a cost point of view. In every situation our aim is to get to a viable and commercial outcome for our client as cost-effectively as possible, taking into account all the risks and variables involved.

We believe it is important to be as open and upfront as possible about the likely charges and costs involved in all aspects of our advisory work. In most cases we charge at an hourly rate. We will, however, always aim to give you a good idea of what we think may be involved based on our extensive experience and knowledge of your particular circumstances.