A dispute between shareholders can arise because of a number of issues. As many of the causes may be unforeseen, it’s vital that steps are put in place in advance to outline what happens in the case of a dispute and be aware of how to resolve them swiftly.
Why do shareholder disputes arise?
- Conflict over management and direction of the company
- Shareholders not being active, failing to pull their weight or departing the company
- Personal problems that impact the business
- Conflicts of interest
- Compensation issues, particularly in relation to dividends
- Illegal or fraudulent activities by member/s of the board
It’s important for people to be aware of their legal rights early on and to have plans and mechanisms in place to resolve disputes at an early stage. It’s common for disputes to escalate very quickly in companies without clear procedures.
To that end, it’s vital to have a detailed shareholders agreement.
Company formation documents should be drafted with potential for disputes in mind. For example, a shareholders agreement may contain provisions where a shareholder may be forced to sell their shares in certain situations.
It should also appoint the non-executive director, chairperson or advisor that is to resolve a dispute – someone who is not involved in the day-to-day running of the company.
When dispute arises
The Companies Act gives shareholders the power to oblige the directors, in some circumstances, to call a general meeting which may be a useful forum to resolve conflicts at an early stage. It also allows for the procedure for the removal of director.
Negotiation is an important tool in resolving issues at an early stage. Strict rights can be used as bargaining chips for a workable compromise.
If negotiation fails, mediation may work which involves getting an experienced mediator to facilitate consensus.
In some cases, a share buyout by an external buyer, other shareholders or the company is required to end a dispute.
Litigation will depend on the type of issue at hand, and it should be a last resort. Generally, the courts prefer that businesspeople reach an agreement prior to the matter being before a judge.
Exposing a dispute to courtroom adjudication can also be a long and expensive process. Under the Companies Act 2014, and, in law generally, there is no allowance for a company to be represented by a non-lawyer director or shareholder in court proceedings, save in exceptional circumstances. In any case, getting legal advice at an early stage of a dispute is often vital to save time and costs.
In the vast majority of disputes, court hearings are held in public, and the effect on the companies and stakeholders’ reputations also needs to be taken into account.
Disputes are best resolved at any early stage through careful consideration and planning of the business structure. For more information on how ACL can assist you in avoiding and resolving shareholder disputes, email email@example.com or firstname.lastname@example.org
17 February 2020