Shareholder disputes can be both damaging and disruptive to a business. They commonly arise, particularly within smaller companies that are owner-managed where differences of opinion arise.
If your business is involved in a shareholder dispute, you are strongly advised to seek legal action as soon as possible. By taking steps to deal with a disagreement early on, you stand the best chance of ending it before matters escalate and positions become entrenched.
At Witan Solicitors, we can help you resolve a shareholder dispute promptly and effectively. We are usually able to find a solution without the need for litigation. Our team has extensive experience in dispute resolution and will work with you to understand your business and how best to achieve your preferred outcome.
For more information about our services, see dispute resolution.
The Legal Nature of Companies
Companies are structured so that shareholders have some power in controlling the actions taken by the company directors. This is intended to provide a system of checks and balances to give a business a robust legal framework and to safeguard it from unilateral action that might not be in its best interest.
Directors’ Positions
Directors run a company while shareholders own it. In small companies, the same individuals are often both shareholders and directors.
A director has a range of duties and responsibilities, including:
- Registering the company
- Dealing with tax, VAT, payroll and annual accounts
- Maintaining company records
- Employing people and fulfilling legal obligations in respect of this, such as complying with health and safety legislation
- Paying creditors and service providers
- Appointing professionals such as solicitors, accountants and auditors
- Fulfilling obligations to shareholders
Shareholders’ Positions
Shareholders own the company by holding shares. They will have a specified percentage of the business. They are not involved in the day-to-day running of the company but have other powers, including:
- Appointing and removing directors
- Issuing or transferring shares
- Approving loans to directors
- Changing the powers that directors have
- Approving a change in the company’s business
- Changing the articles of association
They may have a final say over certain issues such as taking on finance, depending on whether they are a minority or majority shareholder.
Minority vs Majority Shareholders
If a shareholder holds less than 50% of the shares in a company, they are considered a minority shareholder. Where they have shares with voting rights, they will generally have the following powers:
- More than 25% holding - shareholders can block special resolutions such as an attempt to change the articles of association
- More than 15% holding - shareholders can object to varying the rights that attach to certain classes of shares, if necessary, by applying to the court
- More than 10% holding - shareholders can request a vote on issues at a general meeting
- More than 5% holding – shareholders can require a general meeting
A majority shareholder with 75% or more of the shares has the power to pass special resolutions.
A holding of over 50% allows a shareholder to pass ordinary resolutions such as appointing or removing directors and allotting shares.
Why do Shareholder Disputes Occur?
Disputes can arise between shareholders, for example when majority shareholders are blocked by minority shareholders from a particular course of action such as taking on finance or taking the business in a new direction, or where minority shareholders do not agree with the actions of majority shareholders.
This could be due to a difference of opinion over what should happen or due to some shareholders feeling that they are being excluded from decisions. It can also be the case that strong feelings have caused emotions to run high and parties are unable to continue in a business relationship with each other.
In some cases, shareholders may be concerned that directors are breaching their fiduciary duties to the company or failing in their management of it.
How to Resolve Shareholder Disputes
Shareholder meetings allow parties to discuss disagreements and try to agree on a solution.
Where this is not possible, a corporate solicitor will be able to work with you to set out possible options. If the other parties in the dispute also have legal representation, negotiations can be entered into to try and find common ground.
Alternative dispute resolution can also be considered, such as mediation. Other options for resolving shareholder disputes include:
Unfair Prejudice Proceedings
If shareholders believe that the company is taking action that prejudices their position, they can apply to the court. This can be done before the action is taken. By way of example, if the directors are proposing issuing more shares, thereby diluting the holding and powers of the existing shareholders, an application could be made to stop this from happening.
Derivative Proceedings
If the shareholders believe that a director has breached their fiduciary duties, they can bring a claim on behalf of the company. The court can grant permission for the shareholder to act as the company in bringing legal action against a director.
Purchase of Shares
It may be possible to resolve matters by someone buying out the shares of a shareholder who is involved in a dispute. This will generally require a professional valuation of the shares to be carried out.
Winding-Up Petition
If shareholders feel that a company has been mismanaged, if the company can no longer carry on its business or if a shareholder has been excluded from decision-making that they are entitled to be a party to, an application can be made to the court for a winding-up petition on just and equitable grounds.
To be eligible to apply to the court, a shareholder must either be an original shareholder, be the only shareholder or have been a registered shareholder for at least six months out of the previous eighteen months and have an interest in the company being wound up.
This option is usually only a last resort.
Contact our Corporate and Commercial Solicitors
Our corporate and commercial teams can help you tackle a shareholder dispute and try to find a solution without the need for court intervention.
If you would like to speak to one of our expert business lawyers, email us at info@witansolicitors.co.uk or fill in our contact form and we will talk through your situation with you and discuss how we can help. We have offices in Birmingham, Northampton and London.
