Shareholder Disputes - How to Manage and Resolve Them

Ryan Patrick

Apr 26, 2024 • 9 min read

Shareholders (stockholders) are the individuals who own a company through shares.

Each shareholder buys the shares they can afford in a company, owning a portion of the business. Depending on the size of a business, there can be multiple shareholders who own a company.

When shareholders come together to run a business, all entities agree, and the idea of developing a disagreement seems inconceivable. However, the sad fact is that fallouts among a business's founders are commonplace.

As a result, a company can have several shareholders, meaning disputes and disagreements can arise.

Shareholder disagreements can negatively impact a company's running and stability. When these disputes occur, it's imperative to resolve them amicably to ensure a business runs smoothly.

If you're interested in shareholder disputes and how to manage and resolve them, continue reading our insightful article. We'll explore shareholder disputes, why they occur, and how to resolve them.

Causes of Shareholder Disputes

It's no rocket science that when multiple people run a business, it can lead to shareholder disagreements like differing opinions. These disagreements can lead to serious disputes, which can be detrimental to a company. Besides, when disputes are mishandled, they can be hectic, leading to:

Increased legal fees
Time wastage
Damage to a company's reputation
Failure of business

Therefore, it's vital to recognise a looming dispute and act swiftly to salvage the situation. As a result, you prevent the situation from escalating and damaging the business reputation, relations, or growth. Here's a list of the most popular causes of shareholder disputes:

Disagreements on business management by directors
Dividend payment
Making unauthorised modifications to the articles of association
Shareholder deadlock, which affects decision-making.
Personal disputes, especially where family members are the shareholders
When minority shareholders feel like they're not adequately considered.
Conflicts of interest, especially when a shareholder is involved in another business.
Disputes over the proper management of business finances.

The list above is incomplete but illustrates how shareholder disputes can arise from various situations. While shareholders may conflict with one another, the dispute can blow over to affect a director's perception of how a company is managed.

Tips for Managing Shareholder Disputes

Shareholder disputes can spiral into bigger issues among shareholders, customers, and the entire company. Business owners should avoid shareholder conflicts by all means, but if they arise, here are several ways to manage them.

Accept there's a conflict
Be the calming agent
Listen keenly
Analyse the conflict
Model a neutral conflict
Separate the person and conflict
Work together
Agree to disagree
Focus on the company's future
Move past positions
Be creative yet specific
Maintain confidentiality in all matters presented before you

Resolution of Shareholder Disputes

Whenever there's a dispute among shareholders, managing the conflict before it escalates is crucial. The initial step is to have an open negotiation between the shareholders to help them resolve their differences.

Discussions regarding dispute management and resolution are beneficial before further costly steps come into play, like Court Involvement.

Resolving disputes in the early stages is in everyone's best interests to prevent money waste and a legal process that might cause more damage. When disputes are resolved early enough, relations will be maintained, business reputation will be maintained, and the company will operate smoothly.

However, the best way to mitigate shareholder disputes is to prevent them from occurring. How? Ensure that shareholders enter into a shareholder agreement earlier on in the business. With a shareholder agreement, it may be easy to prevent disputes from arising and create a better work environment.

Practical Ways to Resolve Shareholder Disputes

Assuming negotiations don't come to fruition, it's time to explore other options to end shareholder disputes:

1. Read the Shareholders' Agreement

A signed shareholders' agreement is a legal, binding document that can guide parties when they disagree. It is like a company's constitution, which sets out the main governing rules among all parties involved.

When starting a company, it's important to have a shareholders' agreement outlining the company's relationships and the rights and duties of all parties and the company.

A well-drafted shareholders' agreement should contain multiple provisions that can help in case of any dispute. For instance, a shareholders' agreement can include a procedure to compel disagreeing shareholders to sell their shares when faced with a deadlock.

Alternatively, the company articles of association might have dispute resolution provisions tailored to reflect a business's structures.

2. Hold a General Meeting

Your business might be prone to trouble if you only have the standard articles of association and no shareholders' agreement to help resolve a dispute.

Propose a resolution meeting to address the situation and find a possible solution. According to the law, those with at least 5% voting rights can compel the board to hold a general meeting.

Sometimes, calling a formal meeting may help resolve shareholder disagreements through voting. Alternatively, a general meeting can help with an amicable 101 discussions on the subject of conflict.

3. Mediation/Negotiation

Mediation happens when a neutral third party is introduced into a discussion to help parties come to an acceptable agreement by everyone involved. It's an intermediate step between informal talks and legal proceedings.

The process is much cheaper and less aggressive than court proceedings yet more formal than initial negotiation. However, mediation can be a longer process than a typical lawsuit, and no party is bound by anything discussed in mediation unless it's legally binding and signed.

If the disagreeing parties can't agree, buying out the other party's shares in the company may be necessary. However, the disagreeing parties must agree to the price of each share and the impact on any third parties. These impacts include the release from any personal guarantees a party could have signed and the repayment of shareholder loans.

Share buyback is another ideal solution for resolving shareholder disputes. However, the parties involved must agree to sell their shares back to a company and agree on a price.

Before proceeding, check what the company's act dictates about legal buybacks. The parties involved need specialist tax advice and the requisite legally binding contracts to make the process legal.

5. Appoint a New Director or Advisor

Appointing a non-executive director or board advisor who isn't part of a business's daily operations means they're impartial. The individual can help resolve conflicts between shareholders and bring them together, especially where there's a communication breakdown.

When two shareholders own a company, each controlling 50% of the shares, making a decision can be challenging. Shareholder deadlock among owners with equal power challenges decision-making, leading to a conflict.

If the dispute gets out of hand, it can be resolved by changing the business ownership or inviting a new shareholder to join the company. As a result, voting rights are adjusted, making decisions easier when you follow the majority.

Appointing a new director or shareholder brings a new perspective in conflict resolution and works wonders in a team.

6. Legal Action

Litigation is the FINAL move you take to resolve shareholder disputes when all other methods have failed to yield. The court comes in to help reach a suitable agreement among conflicting parties. One of the disagreeing parties must file a lawsuit against the other in litigation.

When parties file a lawsuit, relationships are already damaged in the company, but it's necessary to salvage the company from further damage. The court provides potential remedies to resolve the dispute, like just and equitable winding up of a company.

Here are three remedies in which the court resolves shareholder disputes:

7. Derivative Proceedings

Under the Companies Act 2006, you can bring court action against a shareholder who breaches their fiduciary duties. As a result, a director can raise the matter before a court of law on behalf of the company. Making the wrong decision on behalf of shareholders has consequences for a director, such as a derivative claim or removal as a director.

8. Unfair Prejudice Proceeding

According to the Companies Act 2006, Section 994, an unfair prejudice petition offers a powerful way to resolve minority shareholders' disputes.

If a minority shareholder feels that business is being carried out in an unfair and prejudicial manner that affects their interests, they can raise a claim to correct the conduct.

The court will not be concerned about minor complaints by shareholders. Still, unfair prejudice can apply where major shareholders withhold information from minority shareholders, or they divert business to other companies. Here are more scenarios where unfair prejudice may apply:

Inappropriate use of company assets by directors for their benefit
Issuing shares and consequently diluting minority shareholders' value
Failure to pay shareholder dividends yet paying director bonuses
Directors deny shareholders access to company documents.

9. Winding Up Petition

When shareholders are at a deadlock, it's appropriate to present a petition to wind up the business on just and equitable grounds. For instance, a winding-up petition can be presented when a company is unable to fulfil its original purpose.

It's also applicable where a minority shareholder is left out of managing the company. A court will not easily grant a winding-up petition where other reasonable remedies can apply since it's a drastic measure.

All parties in a company, including the major and minor shareholders or anyone else, are liable to contribute to company assets when it's dissolved. For a shareholder to become a petitioner, they must fulfil the following criteria:

Be a single shareholder in the company.
Be an original company shareholder.
Before the petition is presented in court, the shareholder must be registered in the company for at least six 18 months.
The petitioner must be interested in winding up the company.

Once a petitioner presents a winding-up petition, the court will decide whether to grant it effectively by considering all shareholders' interests. The decision to close a company is discrete to the court as it has serious consequences. However, the court might try to find an alternative solution to the dispute before the draconian remedy.

Shareholder Rights

Shareholders own a company partially through shareholding, which lawfully affords them specific rights and privileges. Some of these rights include the Articles of Association, which state:

The process of appointing directors
Purchase of additional shares - In some cases, shareholders have the right to buy additional shares before offering them to people outside the company.
The right to be consulted - directors consult with shareholders on the company's behalf, such as when making decisions.

To fully understand your rights as a shareholder, you must study the company's articles of association. Other director rights include:

Receiving dividends (company profits) after all expenses have been paid.
Get a share certificate within two months of allocation
The right to access company information like financial statements, shareholder meeting minutes, and annual reports.
Attend shareholder meetings
The right to vote in shareholder meetings
Appeal to the court in some circumstances.

Shareholder Obligations vs Rights

Obligations and rights are the two sides of a coin in the world of shareholders. When you owe someone an obligation, you have a right against them. If you have a right over someone, you're obligated to them. It sounds twisted, right? Don't worry; we'll walk you through it for better understanding.

An obligation is a duty to do something for particular reasons.

For instance, when you enter a lawful contract, you must fulfil it as per the contract. Failure to do so will result in liability for the consequences.

Ultimately, the court can ORDER you to refrain from performing a task backed by the law as provided in the contract you signed. Similarly, the court can also order you to pay money for not fulfilling an obligation.

As for shareholder rights, someone else must fulfil their obligation in your favour or interest. If someone fails to fulfil their obligations, petition a court to order them to do so. Alternatively, the court can order them to pay you a sum when they fail to fulfil their obligation.

Frequently Asked Questions

What are the remedies for shareholder disputes?

Three remedies can be applied by the court to help resolve shareholder conflicts. They include a derivative claim, an unfair prejudice petition, and a winding-up petition for winding up on just and equitable grounds.

What is the best way to resolve shareholder conflict or dispute?

The best way to resolve shareholder conflict is through negotiation or mediation. If these two fail, it may call for more drastic measures like court action, selling the entire company, or buying out the disputing shareholders.

How are conflicts between management and shareholders resolved?

To resolve conflicts between management and shareholders, encourage transparent communication, and keep open channels where shareholders can relay their concerns. Above all, be a good listener and value confidentiality.

In Summary

Having a signed shareholders' agreement in place can prevent future conflicts. A well-drafted shareholder agreement pre-empts most if not all foreseeable eventualities that may lead to conflicts.

Managing shareholder disputes effectively is crucial to maintaining harmonious relationships and allowing a business to grow. Disputes in a company can disrupt business activities if not properly handled. Hence, there is a need to manage and resolve them promptly.

Initially, you can begin by negotiating among the disputing parties and finding a way to resolve the disagreement amicably before escalation. However, if the conflict blows over and hits a deadlock, a court action may be the ultimate solution.

A shareholders agreement and articles of association are crucial documents that any business owner should have in place. These two documents are necessary for a conflict to maintain a business, damage its reputation, and even cause insolvency. You can seek the help of a solicitor to draft a shareholders' agreement that supports your business and limits the chances of shareholder conflicts arising. Do you have any questions about Shareholder Disputes - and How to Manage and Resolve Them? If yes, kindly contact one of our experts here for help.