Shareholder and Partnership Disputes
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Businesses are rarely a one-person endeavour – they’re usually joint enterprises, relying on different people with different skills to help drive growth and set goals. But sometimes, business owners, Directors, Partners and Shareholders don’t see eye to eye. Disagreements over company policies and direction, a lack of role clarity, and even allegations of misconduct or legal wrongdoing can cause strife amongst the leadership of a company.
Disputes can be difficult, emotional and costly, which is why we at Helix Law are dedicated to helping you navigate the murky waters of handling your dispute and taking legal measures if needed.
Though closely related, there are certain intricacies to both partnership and shareholder disputes that make strong, practical legal advice necessary, even if your goal is a peaceful resolution.
We are experienced in advising Directors, Shareholders and Partners involved in disputes often in companies with assets and turnover running into hundreds of thousands, millions, and tens of millions of pounds. These disputes can be wide-ranging, for example, Directors and Shareholders who feel their interests are being undermined and damaged by the conduct of other Directors and Shareholders.
Understandably many Directors and Shareholders are focused on their business. Director and Shareholder rights, and the law in this area, can often be completely unknown.
Types of Conflict
The simplest example of a dispute comes from a Director, Partner or Shareholder not holding up their end of their agreement, doing something they should not be doing, or pressuring another party with a view to taking advantage. Some issues can be more clear-cut, for example, the removal of company assets or money without consent. We frequently deal with resolving such issues. Other problems can also arise, however, that are not so clear-cut, such as one party wanting to exit the company and the other not being in agreement.
Generally, disputes are linked to personal breakdowns in relationships in one form or another. Sometimes, Directors, Partners and Shareholders feel there may be an imbalance of power and bargaining position. A Director, Shareholder or Partner might want to redefine the benefits they receive or their role and expectations may change. If the other Directors, Shareholders and/or Partners don’t agree, there is a risk of misunderstanding, growth in frustration and miscommunication, all of which can lead to steps being taken which are unlawful and can require swift and clear remedial action to resolve the problem.
All disputes are unique to the companies and people involved in them. We assist some Directors, Shareholders and Partners who merely need discreet advice behind the scenes on their position, rights and best next steps in support of their conversations and ensuring they are well-positioned in any negotiations. This can include negotiations around an exit from a company. More significant disputes and problems include where a Director, Shareholder or Partner has unlawfully removed assets from a company or Special Purchase Vehicle (SPV). This can include money and/or developments/property. We regularly act in High Court claims to recover assets in order to protect the value of the company for the benefit of Shareholders and Directors. In taking these steps we also assist our clients in creating leverage to force a settlement on advantageous terms.
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. Where necessary we’re happy to assist in getting you back on the front foot and improving your bargaining position.
Shareholder Disputes and ‘Unfair Prejudice’
Shareholders in the UK enjoy many automatic statutory rights and protections, including from the conduct of other Shareholders, and legally implied protections in relation to Director conduct. Many of these are set out within the Companies Act 2006.
In many ways, the Companies Act 2006 sets out the minimum rights of Shareholders, coupled with the company Articles of Association and any Shareholders agreement.
Shareholder Rights and Duties
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. We find that in the context of a dispute, these rights can be treated poorly or overlooked/ignored entirely.
Particularly in smaller enterprises, Shareholders often have other implied duties – business owners might 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. Sometimes the courts will consider such companies as ‘quasi-partnerships’ reflecting the courts’ view that whilst technically companies, they should be treated differently to, say, larger companies (otherwise also subject to the same law) due to their small and intimate nature.
The Importance of Shareholder Agreements
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. We often find disputes arise in companies where there are no agreements in place and over time there has been a divergence between the parties involved and no default contracts in place.
A minority Shareholder can often feel their rights have been ignored, resulting in them suffering financially, or perhaps a collection of Shareholders can move to look at ousting another Shareholder.
Conduct that is ‘unfairly prejudicial’ to another Shareholder can be challenged and prevented, as set out within s.994 to s.996 Companies Act 2006.
Section 994 Companies Act 2006 gives minority Shareholders access to remedies in situations where your shareholding is deliberately devalued or where you are removed from the management of the business (if say, where you had an expectation you would be involved). This applies even where there are no formal contracts or agreements in place between Shareholders and is designed as a safety net to protect you.
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 for claims of unfairly prejudicial behaviour, which can lead to legal retaliation. Often these will not exist.
Section 994 of the Companies Act 2006
Section 994 claims are known as petitions (to the court). These are specialist types of court proceedings which we pursue in the High Court on your behalf. These petitions/claims allow Shareholders to go to court to complain:
- “that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
- that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
As part of the remit to assist Shareholders, the court has incredibly broad discretion and powers when considering these types of claims.
The Shareholders or Directors (or both) who have acted inappropriately (unfairly and prejudicially) will be named Defendants/Respondents to the petition and claim personally. As their conduct is for their own personal benefit, any thinking of limited liability protection (for example because of the company being a limited company, or the partnership being an LLP), fall away. The court looks at the conduct of the Directors and Shareholders personally for this reason. The Company itself is also normally a Defendant/Respondent also, but that is so that technically they are bound by, and cannot be said to be unaware of, the court proceedings that will clearly relate to the company itself.
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What is Unfair Prejudice?
There is no specific or definitive answer to this question but in simple terms (at risk of stating the obvious) conduct which is both ‘unfair’ and which is ‘prejudicial’ to one Shareholder or class/group of Shareholders, versus another.
The following are all examples of conduct that might amount to unfair prejudice:
- any Shareholder acting in breach of the articles of association (or constitution/rules of the company);
- excluding a Shareholder from the business, management or information of the company, despite earlier agreements or arrangements;
- where the value of shares is being deliberately devalued;
- excessive awards of Director pay; and
- mismanagement of the company including monies and/or assets.
To successfully pursue an unfair prejudice petition, Shareholders must show that the actions of the Shareholder were both unfair and prejudicial.
Unfairness is considered and tested by the court on an objective basis – would a reasonable bystander think that the actions and conduct were unfair?
What Happens if the Claim is Successful?
If the court agrees that the Shareholder has suffered from unfair prejudice, remedies are incredibly broad and are set out in section 996 of the Companies Act 2006. A common order in these types of court proceedings is what’s known as a share purchase order, or an order where one party is ordered to buy the shares of the other. A judge can also make orders regulating future affairs, requiring Shareholders and/or the company to do or not do something to rectify the problems. Other remedies can include petitioning and claiming for “just and equitable winding-up” in accordance with s.122(1)(g) of the insolvency act 1986, and/or a derivative claim (a claim brought by the company itself) which is possible and which can be pursued in addition in accordance with sections 260-264 of Companies Act 2006.
Importantly, most unfair prejudice petitions and claims are resolved via a negotiated settlement. The pressure of costs, and the risk of a Shareholder being ordered to pay the costs of the other Shareholder as well as their own, can mean that tactical use of these types of court proceedings can force a wayward Director, Shareholder or Partner to act in a far more commercially sensible way.
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 (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 outline key responsibilities but should also lay out how disputes are to be handled should they arise. If no partnership agreement exists, a business is automatically subject to the Partnership Act 1890, 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 that limited partners have with regards to business debts and their overall limited responsibilities within the business. Disputes can come up when limited partners feel they deserve more input into company decisions, they commit legal wrongdoing, act against company policies, or when a Partner wishes to withdraw.
Partners and Members in partnerships and LLP’s have mirror protections to Shareholders in limited companies. In this way, Partners can also suffer unfair prejudice and can have rights to remedies including as a result of the Partnership Act 1890, and the Companies Act 2006.
If you’re currently facing a partnership dispute, Helix Law can help you find solutions and understand your options, especially if your business is facing dissolution because of a dispute.
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 within a company.
Both Partners and Shareholders have partial ownership of a company. Partners usually divide ownership of a 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 are 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 that 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.
How Disputes Can Arise
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 business find a satisfactory solution without bringing your case to court, if at all possible.
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People frequently tell us that we’re approachable and offer great advice.
They also tell us most solicitors are hard to get hold of whereas we’re happy to listen. The reason for this is that we value long term relationships and we’re happy to speak with business people, to invest our time in understanding your business and whatever your concerns are. Only at that point can we understand whether we’re the right people to help you.