Shareholder Disputes

It is not uncommon for shareholders of a private company to end up in a dispute; their interests do not always align, their views on the direction or management of the business often differ and shareholders can end up feeling excluded and that the company is being run for the benefit of others over them, resulting in a company which cannot properly operate, and shareholders who wish to go their separate ways.

What are shareholder disputes?

No two shareholder disputes are the same; they vary between businesses and arise for a variety of reasons. Businesses which are poorly run are especially susceptible because the shareholders become concerned that the mismanagement will adversely affect their financial interests, triggering them to take legal action to protect their investment. So, what happens when shareholders disagree?

Often, the relationship between majority and minority shareholders can cause friction, with minority shareholders finding their preferred course of action for the company being blocked, or being pressured by majority shareholders to take a course of action they do not agree with. This is known as Unfair Prejudice, and the Companies Act provides a mechanism for the disadvantaged shareholder to try to resolve this type of dispute.

Smaller and medium sized companies, where the shareholders are also directors and are responsible for the day-to-day operation of the business, are also vulnerable, and leave the disputing parties struggling to balance their interests as shareholders, their duties as directors and their personal relationships, all within what is usually their full-time job.

Occasionally, a company might be at a complete deadlock preventing it from functioning, or it might no longer be able to fulfil its purpose. In those circumstances, it might be appropriate for the company to be wound up. Our Insolvency specialists can advise you on the winding up procedure.

How to resolve shareholder disputes

Before taking any legal action, all shareholders involved in a potential dispute should consider the following questions:

• Did the shareholders enter into a shareholders’ agreement?
• What rights are provided by the company’s articles of association?
• What were the shareholders’ expectations and understanding when they invested in the company?
• What has caused the dispute?
• What are the parties trying to achieve?

Often, once these questions have been answered, it is possible for the disputing shareholders to settle their differences and avoid expensive litigation. Very few cases ever reach trial, and most do not even get to the point where a claim has to be issued. However, where this is not possible, we have a wealth of experience acting for shareholders and have a track record of resolving disputes at an early stage to avoid a disruptive, time consuming and financially draining trial.

If litigation is required, is there any funding available?

Generally, if your claim is winnable, and there is a good commercial benefit to the claim being pursued, there will be a funding option available to you if you are unable to privately fund the full costs of your claim yourself. Once we have reviewed your claim and – often with the input of a barrister – assessed the prospects of it being successful, we will be able to recommend funding options to you.

Shareholder disputes can be costly, time-consuming and very harmful to your business and business relationships. Whatever the situation, advice should be sought as soon as possible to ensure the best possible outcome.

If you need any advice on shareholder disputes, please contact a member of our commercial disputes team in confidence here or on 02920 829 100 for a free initial call to see how they can help.