Nick Parker, a dispute resolution partner at Berry Smith Lawyers and a civil and commercial mediator, considers disputes that can arise between shareholders and the options of resolving them.
People engaged in business together sometimes disagree with each other. While most disagreements are resolved quickly by the parties themselves, some are more serious and end up in a formal dispute. Disputes between shareholders in SMEs, who often also hold roles as directors, can be distracting for the participants and for the business itself.
Common disputes include the exclusion of a party from decision making, a deadlock in decision making, performance issues (where one party is perceived not to be ‘pulling their weight’ or performing to a required standard), or a divergence in future plans for individuals.
If a shareholder agreement exists, it will be relevant in assessing the parties’ rights and potential solutions, though it will not necessarily adequately deal with the issue in dispute.
Often, there is no such agreement. Business relationships are entered into when relationships are strong and the outlook is positive, and the parties do not turn their minds to think what could go wrong later, or see a shareholder agreement as an unnecessary expense.
The company’s Articles of Association will also contain relevant provisions as to the parties’ duties and responsibilities.
In addition, Part 30 of the Companies Act 2006 enables a minority shareholder in a company who is being treated in an ‘unfairly prejudicial’ way to seek relief from the court. Such a claim is commenced against the other shareholders on an individual basis, with the company also being joined in to the proceedings.
If the Articles or shareholder agreement contains a mechanism for offering shares to the other shareholders at a fair price, then until that procedure is used a petition brought may be struck out.
The subject of unfair prejudice claims often include exclusion of one shareholder by others from the affairs of the company, misappropriation by one shareholder of property belonging to the company, or of a business opportunity that might have been enjoyed by the company. The unfair prejudice may also take the form of wrongful dealings with shares, failure to hold meetings, improper dividends or other payments of other improper conduct of the company’s affairs. The existence of a ‘deadlock’ situation within the company is, on its own, unlikely to amount to unfair prejudice.
The unfair prejudice may consist of acts or omissions in the past, present or which are anticipated. It must comprise conduct of the company’s affairs and be an act or omission of the company or an act or omission on its behalf. ‘Unfairness’ is judged by ordinary meaning of the word. Keeping promises and honouring agreements are important. The prejudice suffered must be substantial.
The court will examine the relevant rules that apply to the shareholders, and examine the facts of the alleged prejudice before reaching its conclusion as to whether the claim is successful.
If the claimant successfully establishes his claim the court will impose a remedy. The court has wide powers to control the conduct of the affairs of the company and its shareholders. Most often, proceedings result in the court ordering that one shareholder should purchase the shares of another at a value determined by the court to be fair in the circumstances.
The court will grant the minimum remedy to repair the misconduct and unfair prejudice suffered and prevent it happening in the future. This could involve orders regulating the affairs of the company.
One remedy available to the court in an unfair prejudice claim, and a separate claim in its own right where there is 50:50 shareholding deadlock, is that the court is invited to make an order of ‘just and equitable’ winding up of the company.
The downside of such a decision should be obvious. The business comes to an end and is liquidated. While that can free up the parties to carry out new business opportunities, it is an exercise in destruction of the previous business.
Whatever the basis for the dispute, there are several options for resolution. If there is a shareholder agreement in place it may well be that the agreement will include a provision setting out a specified dispute mechanism. The Articles may also assist.
If not, the usual forum for dispute resolution is through the courts. However, the vast majority of cases are resolved well before any trial of a claim, with litigation seen as the last resort.
The threat of litigation or litigation itself can act as a trigger for the parties to consider forms of alternative dispute resolution (ADR). Increasingly, commercial agreements are providing for there to be an attempt at ADR before litigation can be commenced. ADR can often provide a cost effective, flexible and commercial outcome – and the sooner it is undertaken the better.
At their worst, disputes can end in the complete breakdown of the relationship between the parties and potentially bring about the end of the business.
Please contact us if you would like more information about the issues raised in this article on 029 2034 5511 or dispute@berrysmith.com
Nick Parker, Partner and Head of Dispute Resolution at Berry Smith LLP, Mediator, and a member of Law Society’s Civil Justice Committee.
029 2034 5511