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What are the differences between partnership and shareholder disputes?
To fully understand the differences between partnership disputes and shareholder disputes, it’s important to first understand the unique roles that shareholders and partners play with a company.
Both partners and shareholders have partial ownership of a company. Partners usually divide ownership of the company between other partners and are involved in the general business operations of a firm. Partners help manage a company’s employees and guide its practices, both day-to-day and in a big picture sense.
Shareholders, on the other hand, purchase partial ownership of a company through shares, which help to fund a company’s operations. They’re given voting rights on a large variety of topics, but don’t necessarily have management responsibilities unless otherwise agreed upon.
Both have input over general business operations, but each to a different degree depending on what percentage of ownership they hold. Both can be subject to specific partnership or shareholder agreements, which are written legal documents that detail what a partner or shareholder contributes to the company and what they receive in turn (such as dividend payments or capital contributions).
Ultimately, these agreements tend to be very similar to each other. The Companies Act 2006 has granted shareholders additional rights which affect their involvement with their companies. In some cases, there’s a significant amount of overlap between directors and shareholders, but a company’s specific delineation between the two should be codified in their articles of association and bespoke agreements.
Disputes can arise for any number of reasons, from personal feuds to friction from disagreements regarding business operations to unlawful behaviour. Many disputes can be avoided simply by having detailed, thorough shareholder and partnership agreements that codify responsibilities and steps for handling problems. But even when agreements are clear, individual feelings and opinions can change, especially as a company grows. This is how a dispute is born.
Resolution of disputes can be difficult to achieve, depending on the specific circumstances from which they arise. A good solicitor can help you navigate the process of mediation or negotiation to quell disputes, as well as help pursue litigation in court if necessary. Here at Helix Law, we’re dedicated to helping you and your company find a satisfactory solution without bringing your case to court if at all possible.
Types of Conflict
The simplest example of a dispute comes from a partner or shareholder not holding up their end of their agreement – but often, problems can arise that are not so clear-cut.
Disputes can be interpersonal in nature or result from professional disagreements. Sometimes, partners and shareholders feel there may be an imbalance of power and want to redefine the benefits they receive or what their role expectations are. All disputes are unique to the companies and people involved in them, and seeking legal advice doesn’t necessitate court action – it can often simply help people step back and re-evaluate their situations and find mutually satisfactory solutions.
Many businesses are founded on partnerships when two people agree to go into business together. There are actually three types of legal partnerships in business. They are:
- Ordinary/general partnerships
- Limited partnerships
- Limited liability partnerships (or LLPs)
An ordinary partnership is the simplest form, involving at least two partners running a company together on more or less equal terms. Limited partnerships are comprised of a mix of limited and ordinary partners, wherein different partners have different roles within the company and therefore limited liability for partnership debts and other financial situations. LLPs are simply taxed as partnerships but are functionally more akin to a corporate entity.
A partnership agreement should not only lay out key responsibilities but also how disputes are to be handled should they arise. If no partnership agreement exists, a business is automatically subject to the Partnership Act 1980, which essentially says ordinary partners share in the profits and liability equally, and ending the relationship requires dissolving the business entirely. This means ending an ordinary partnership because of a dispute can be costly and time-consuming if no agreement is in place. Furthermore, without an agreement, ordinary partners have equal claim to profits, even if they do less work.
Limited partnerships and LLPs generally refer to the reduced liability limited partners have with regards to company debts and their overall limited responsibilities within the company. Disputes can come up when limited partners feel they deserve more input into company decisions, they commit legal wrongdoing or act against company policies, or when a partner wishes to withdraw.
If you’re currently facing a partnership dispute, Helix Law can help you find solutions and understand your options, especially if your company is facing dissolution because of a dispute.
Shareholders in the UK enjoy many unique rights in accordance with the Companies Act 2006, which expounds upon the minimum rights shareholders are required to possess. As a group, shareholders generally have internal voting rights that allow them to decide upon a variety of things, from electing board members to winding up the company, regardless of solvency.
Particularly in smaller enterprises, shareholders often have other duties – one of the business owners could be a shareholder, for instance, while also working day-to-day as a company director. Disputes can happen as a result of power imbalances among minority and majority shareholders, especially when it comes to disagreements over the direction of a business or allocation of assets when the right to do so is unclear.
As with partnerships, shareholder agreements eliminate many uncertainties and lay out how disputes can be handled. These agreements act quite like partnership agreements, explaining role expectations, decision-making powers, solutions to company deadlock, and so on. Agreements should also outline standard procedures in cases of suspected impropriety or misconduct.
Specific disputes often take the form of either a minority shareholder feeling their rights have been impinged upon or a collection of shareholders looking to oust another member. The Companies Act 2006 has clarified a number of indelible rights minority shareholders hold in particular, namely with regard to “unfairly prejudicial” conduct.
Minority shareholders may find themselves in a situation where they feel a company is acting in a manner that is unfairly prejudicial – which is to say, the business has acted in bad faith or treated the minority members poorly. On the other hand, when a dispute comes with the decision to force the removal of a shareholder, it’s not always as simple as merely voting to force the sale of their shares. A good shareholder agreement should outline ways to remove shareholders in a way that doesn’t necessarily allow claims of unfairly prejudicial behaviour, which can lead to legal retaliation.
Ultimately, there are often no easy answers when it comes to shareholder disputes, especially with the relatively new statutory rights enacted under the Companies Act 2006. One of our expert team members at Helix Law can speak to dissatisfied shareholders free of charge and help take other resolution steps to avoid litigation.
Resolving Conflicts with Helix Law
Most often, the best course of action for partnership and shareholder disputes is addressing them early and working towards mediation or negotiation. Escalating a dispute into the litigation process can be costly and time-consuming for all parties involved, so if a conflict can be resolved peacefully outside of court, it’s often the most beneficial outcome for all involved.
We approach each case with a mind towards cost-efficiency and practicality, meaning we’ll take the time to fully understand your case and the needs of your business. Going to court is an expensive decision, so we’re prepared to help with mediation and negotiation to find suitable solutions for all involved.
However, sometimes equitable agreements simply can’t be reached. If you realise litigation has become unavoidable in your dispute, we can often work with you to establish a payment plan to afford full legal representation, such as deferring payment or only charging you if the case ends successfully.
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A good solicitor can do more than just take someone to court. We can help you fully understand your specific rights, both in a legal sense and according to your company’s articles of association. We can also help mediate a situation and act as an outside party to help evaluate each side of the dispute. Furthermore, we can help you devise an action plan (one that doesn’t have to include litigation, if you so choose) that mitigates financial risk and reduces further chances for conflict.
Warning signs will depend on the specific individuals involved and the nature of both the company and their role within it. For example, if you’re being denied access to records and company books that you previously had access to, this may be a sign that a partner is trying to hide some wrongdoing or perhaps lock you out of the business. Furthermore, if you feel your partner is falling behind on their duties to the company and is unwilling to address their behaviour or step down, you may want to dissolve the partnership.
Conflict can also arise from general business misconduct, even if it isn’t necessarily directed at you. Examples of this include:
- Stealing clientele – such as taking advantage of opportunities and directing clients towards an independent business
- Acting improperly with customers or employees – like behaving rudely or unkindly in a way that reflects poorly on the company
- Falling behind on work or neglecting it entirely
- Undermining the authority of other shareholders or partners
- Committing tax fraud
- Misusing or misappropriating funds
The Companies Act 2006 provides certain protections from unfairly prejudicial treatment for minority shareholders. Shareholders generally have little input in daily company affairs, but they are not without their rights. Examples of unfairly prejudicial behaviour include:
- Abuse of power or breaching company policy, in ways that harm minority shareholders
- Majority shareholders diverting business to other companies at which they hold significant interest
- Exclusion from meetings or denial of voting rights
- Failure to pay rightfully deserved dividends
- Denial of company management rights when otherwise guaranteed in a shareholder agreement
The least expensive route is always addressing issues before they intensify. Even if you don’t think one is necessary, a legal advocate can be immensely helpful in negotiations and mediations, particularly if the dispute in question surrounds potential legal wrongdoing.
Mediation involves bringing in a neutral third party to assess a problem and listen to all sides of a story in order to reach a compromise or agreement that both parties feel comfortable with. It’s a useful process, especially for issues that are fraught with emotion or a lack of clarity.
Should a dispute require court intervention, we are happy to set up funding arrangements if your case is just.