In this article, we discuss the most common shareholder disputes and how to resolve them.
As much as running a business can be an exciting and fun enterprise, there are also many challenges and struggles that accompany it. One of the main challenges a business can face are shareholder disputes, where you have disagreements with the other owners in the company.
Shareholder disputes can be timely and costly to your company, so it is important to seek legal advice in order to advocate for you and resolve your case. Below, we take a look at the most common types of shareholder disputes and how to resolve them…
What are Shareholders and Why are They Important?
To put it simply, shareholders are the people who own the company. A shareholder may also be an employee, director, or both.
Each shareholder owns at least one share of stock in the company, known as an equity. Shareholders are entitled to a vote on certain managerial decisions, as well as dividend payments.
Due to the money at stake, shareholder disputes are quite common, so it is important to seek out ways of resolving them as soon as possible.
What Are the Rights of a Shareholder?
Shareholders commonly have the rights to:
- Inspect company registers
- Require the company organise a general meeting
- Sell their shares and purchase new shares
- Propose and vote on shareholder resolutions
- Nominate directors
- Receive dividends
- Vote on management proposals
- Sue the company for violations of a fiduciary duty
- Buy-out other shareholders
- Personal claims against the company
- Just and equitable winding up petition, in accordance with the Insolvency Act 1986
- Derivative claims, in accordance with the Companies Act 2006
- Unfair Prejudice Petitions, also in accordance with the Companies Act 2006
Common Causes of Shareholder Disputes
Below we take a look at some of the most causes of shareholder disputes:
Disagreements over the Direction of the Company
Disagreements over the direction of the company tends to occur in smaller and start-up companies, where the drive to growth is more significant. These disagreements usually take place due to weak leadership of company culture, as they have failed to align everyone to share the same future goals.
Poor Staff Management
This often occurs when shareholders feel they are not being provided with adequate information about the company’s affairs. Poor staff management can affect new investors, overall profit and employee turnover.
Violation of Shareholder Agreement
You have violated your shareholder agreement if:
- You use the company to benefit your own personal interests which conflict those of the company.
- You intentionally mislead other shareholders or directors to benefit your own vested interests.
- You fail to meet the standards required of someone to work at the company, for instance, if you are an accounting director but you fail to keep proper finance records. This type of infraction can lead to director’s disqualification.
- You don’t comply with your company’s articles of association. For instance, you don’t declare any personal interests you have in a proposed contract your company intends to have with a third party.
Minority Shareholders Being Unfairly Prejudiced
Despite minority shareholders pertaining the same rights as any other shareholder, many disputes arise from minority’s feeling as if they are being disregarded. This can happen through the board that are the majority abusing the minority’s rights.
Breaching Fiduciary Duties
Fiduciary duties involve shareholders exercising a discretionary power to act on behalf of the company, to benefit the business and to put their own personal interests to one side. Breaching this could include shareholders withholding vital information when there is a conflict of interest to the company, presumably to benefit their own interest.
Clashing Personalities
Colleagues not getting along can be down to a number of things, including clashing personalities, and differing approaches to things and how they see life. Whilst it is normal for not everyone to be friends or get along, personal problems can have a negative impact on business relationships and agreements.
How to Resolve Shareholder Disputes
Below we take a look at some of the ways to resolve shareholder disputes:
Check the Terms of the Shareholder’s Agreement
If the terms are clear, this should provide an answer on the way to handle things. However, if this fails you can look into seeking legal advice or appointing a mediator.
Pass a Resolution to Hold a General Meeting
Before jumping to court proceedings or selling the company, you should try talking through the issues you have and see if you can come to some middle ground. Not only is this an effective tactic but it also the cheapest.
Appoint a Mediator
In addition to holding a general meeting, you could bring in someone from outside of the board who could act as a mediator. This could help bring in a fresh and more objective perspective on the dispute, and eventually bring the parties to some sort of resolution.
Take the Dispute to Court
If you have tried talking things through and you’re still reaching no agreement, there is always the option of taking the dispute to court. With the help of legal aid, you will be able to reach a resolution. It is important to bear in mind, taking the dispute to court is costly and should be a last resort.
Consider Selling the Company
Again, this one should be a last resort, but if you cannot reach a resolution, you can consider either selling the company or petitioning the court to have the company wound up. Clearly, these options are not an ideal outcome and should only be resorted to if all else fails.
Feeling Confident in Resolving Your Shareholder Dispute?
Whilst shareholder disputes are a common occurrence, they can be costly and time-consuming as well as potentially jeopardising the company altogether. This why it Is crucial to try and resolve it as soon as possible, as well as exploring more relaxed options first such as appointing a mediator and holding a general meeting.
It is advisable to only consider selling the company or taking the dispute to court as last resort. Otherwise, you may risk losing a lot, as well as it being costly and using up a lot of resources.
Please be advised that this article is for general informational purposes only and should not be used as a substitute for advice from a trained business professional. Be sure to consult a business or legal professional if you’re seeking advice about dealing with shareholder disputes. We are not liable for risks or issues associated with using or acting upon the information on this site.
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