When things are running smoothly owner-managed and family-run companies can make for particularly fulfilling working environments. But close-knit workplaces, where the relationships extend beyond pure commercial ties, are also particularly vulnerable to disputes between shareholders quickly escalating and entrenching.

However, by being aware of some of the most common issues that occur, it is possible to avoid disputes arising, or at least dealing with them effectively if they do.

Disagreements often arise due to “blurred lines”, and particularly lack of clarity regarding roles, responsibilities, rights and objectives. It’s therefore helpful to identify, right from the start, who wears which hats – whether they are shareholders, directors, employees, consultants and so on. Articles of Association, service agreements and shareholders’ agreements can all help to define how a company is run, including who has decision making powers, voting rights and how risk and reward is allocated.

A shareholders’ agreement can be particularly helpful in ensuring that disputes between shareholders are avoided. By periodically discussing and putting a clear agreement in place that outlines roles, responsibilities and rewards, it’s easier to stay true to the business purpose – and having something in writing can provide an invaluable reference point if things do begin to deviate from what’s been agreed.

But, particularly where there are family or friendship bonds, the necessity for ensuring alignment of objectives and understandings and getting them documented can often be skipped over. The process of aligning objectives can often be seen as awkward, a demonstration of mistrust and an unnecessary expense/distraction – something similar to a “pre-nup” in the matrimonial setting. However, this can lead to misplaced assumptions and misunderstandings.

If a shareholder dispute becomes intractable and a shareholders’ agreement either does not provide an answer or does not exist, there are nonetheless often routes to resolve the impasse. Consideration of the wider commercial picture is key to understanding what rights and obligations exist, even if not always clearly written down.

One option may be for for shareholders to consider bringing (or at least threatening) legal proceedings under section 994 of the Companies Act 2006 to protect themselves from “unfair prejudice”.

A minority shareholder can apply to the court by “petition”, on the ground that the company’s affairs have been conducted in a way that’s unfairly prejudicial to the interests of members – or that an act or omission is or would be prejudicial. Examples can include:

The Court will often look beyond the “bare bones” of what terms have been documented and take into account less formal understandings, that can often be gleaned from conduct over the years.

If an unfair prejudice claim is established, the court can make any order it sees fit. This could include regulating the future conduct of the company; requiring the purchase of the aggrieved party’s shares on a fair valuation; requiring the company to perform specific acts etc. However, the most typical remedy is an order that the shareholder(s) responsible for the act of unfair prejudice buys out the shares of the claimant.

Unfair Prejudice is only one potential route open. Alternative avenues of attack can include employment claims, petitioning for ‘just and equitable winding-up’ of the company under section 122(1)(g) of the Insolvency Act 1986 and “derivative actions” where a shareholder can step into the shoes of the company to bring a claim, for example for breach of director’s duties.

Private company shareholder disputes, particularly in a family and friendship setting, can often escalate and entrench quickly and then become difficult to untangle and resolve. They not only risk suffocating the business of the company, but can also lead to disproportionate time and expense and the permanent breakdown of relationships. Parties often need to act fast to find a resolution in order to avoid damaging the business.

Thankfully, there are plenty of options available for resolving disputes and the underlying commercial issues – and we can help you find a workable strategic solution to protect your rights, commercial objectives and preserve your relationships. In many cases we can help you guide the issues to a practical conclusion without even “putting our head over the parapet”. For an early confidential no-obligation discussion, get in touch with a member of our team.

Key Partner contact details:

email: astewart@loneystewartholland.co.uk
call: 07869 435226

email: rloney@loneystewartholland.co.uk
call: 07940 214020