Dispute Resolution Options for Shareholder Agreements in the UK

Shareholder disputes are predictably common, with potential disagreement over anything related to company affairs, from non-payment of dividends to concerns over director behaviour or company management.

Shareholder disputes have the potential to be long and drawn out, causing real harm to business operations. The adage of ‘prevention is better than cure’ couldn’t be more apposite. 

This article details the most common causes of shareholder disputes, how to resolve them, and the best ways to prevent them from occurring.

Understanding Shareholder Disputes

What Are Shareholder Disputes?

Shareholder disputes are conflicts that affect the management and operation of the company.

Common Causes of Shareholder Disputes

Our commercial litigation team act in shareholder disputes across the country. There is no one rule or cause of these disputes arising- we’ve seen a wide variety of cause and effect. Almost anything can be at the heart of a shareholder dispute, but some common scenarios crop up with alarming regularity.

One of the most frequent disputes commercial lawyers see is disagreements over managing a company’s finances. These may be inextricably linked to how the business is run, leading to compliance and regulatory problems.

In a family business, difficulties in personal relationships outside the company can inevitably spill over and result in business disputes in the boardroom.

Paying dividends is always a hot topic and can lead to disagreements when shareholder expectations are not matched with reality.

Conflicts of interest lead to disputes if a senior company member is involved in another competing business.

Shareholder deadlock, so a 50:50 split on a vote may not start as a dispute, but will rapidly become one. Some decisions need a majority vote to pass or unanimity. If the shareholders can’t agree, then this also becomes a deadlock.

Minority shareholders often become vocal if they feel the company is overlooking their interests. A new share issue that dilutes an existing holding is bound to receive opposition.

How Can Shareholder Disputes Impact a Business?

Shareholder disputes can severely disrupt a company’s day-to-day business operations. If a deadlock situation arises, commercial paralysis may follow. 

Disputes lead to financial loss, and long-running disagreements cause reputational damage.

What Legal Rights Do Shareholders Have in a Dispute?

The legal rights a shareholder may exercise will depend on the unique features of the company’s structure and the specifics of the disagreement.

What a shareholder can do in a dispute will be partly dictated by their class of shares and the attached voting rights. Strategic voting on key business decisions allows shareholders to influence the outcome in contested situations.

Shareholders also have the right to access key information such as financial records (e.g., annual accounts), though it should be noted that they don’t have automatic access to board minutes.

More widely, shareholders have rights enshrined in law, such as the ability to bring an unfair prejudice petition. 

Shareholder Dispute Resolution Methods

Different options exist depending on shareholder voting rights, what’s written in the shareholder agreement and the company’s articles, and ultimately, the exact situation in the company itself.

Negotiation

Negotiation is an informal and non-antagonistic way to manage a dispute. The idea is to reach a mutually acceptable solution.

Mediation

Mediation is a form of Alternative Dispute Resolution (ADR), a course of action that can be more effective than negotiations between the parties and avoids expensive litigation in court.

Mediation is a brokered solution in which a trained mediator, an impartial third party, works with those in dispute to help them reach a resolution. Mediation does not impose a solution on the conflicting parties.

Mediation is often the first route to resolution and may be prescribed in the shareholders’ agreement or the company articles. Unlike following a legal process through the courts, it’s quick to arrange and can be highly effective.

An Unfair Prejudice Petition

Sometimes court action is unavoidable, especially if other dispute resolution routes are unavailable or have failed.

If a shareholder believes a director or company officers are managing the business in a way that unfairly affects their interests, they can bring an unfair prejudice claim under Section 994 of the Companies Act 2006.

Some examples of unfair prejudice include a director using company assets for personal benefit or refusing to sanction a dividend payment but paying themselves a bonus.

Court action may result in success, but it comes at a financial cost and can take time. In the meantime, the company may be unable to perform effectively.

Litigation also has the potential to leave business relationships permanently fractured and damaged. A shareholder may have solved one dispute, but can encounter a legacy of a difficult or unworkable business climate going forward.

A Derivative Claim

If directors act unlawfully or breach their duties, a shareholder may bring a derivative claim against them. The company brings a derivative claim through its members on the company’s behalf; the company is a separate legal entity or person.

A Winding Up Petition

A winding up petition is the option of last resort. Winding up is when a shareholder petitions the court to wind up the business on just and equitable grounds. To do this, specific legal criteria must be satisfied.

Winding up is an option if the company isn’t being appropriately managed and other attempts to resolve this haven’t worked. It’s also used in situations of shareholder deadlock.

Winding up effectively closes the company down, so it’s the point of no return.

Implementing Strategies To Avoid Shareholder Disputes

It’s not possible to completely prevent shareholder disputes. However, there are active and preventative strategies that will minimise the risk when implemented.

An overriding objective is to ensure good communication on all company matters and at all levels. Many disputes start due to a lack of information or misinformation.

Clear communication channels and regular meetings will reduce the chances of disagreements and flag unrest early, heading things off before they become entrenched. Communication can reduce misunderstandings and promote trust.

Share valuation and sale should be the subject of a transparent process so it’s easy for a shareholder to part company. Similarly, financial reporting should be regular and accessible to all shareholders.

Anticipate the likelihood of some disputes and set out clear steps to handle them, either in the shareholders’ agreement or the Articles of Association. 

Mediation is the most popular choice. It’s practical, economic, and quick. Mediation has the benefit that the solution comes from the parties in conflict, which helps preserve business relationships. 

There should be a provision somewhere in either the shareholder’s agreement or the Articles to manage a deadlock situation. Deadlock arises when shareholders can’t reach a unanimous or majority decision.

Without a provision to manage deadlock, shareholders can find themselves in a situation where mediation or litigation are the only options to move forward.

‘Off-the-shelf’ companies have a ‘model’ Articles of Association which contain a provision that decisions can only pass with a majority of shareholders voting in favour. If there’s a 50/50 split, then the chair has the casting vote.

Frequently Asked Questions

How Do You Resolve a Shareholder Dispute?

There are many different ways to resolve a shareholder dispute; the best route is usually the quickest and with the least damage to business operations. Mediation is often the best choice because it puts conflicting parties in a position to work out the problem themselves and can preserve business relationships.

How Do You Deal With Deadlock in a Shareholder Dispute?

One way to break a deadlock is to alter the company ownership by one shareholder agreeing to leave or by bringing in other investors. If the deadlock is immovable, then it may come down to mediation or litigation. It’s vital to have a provision in either the shareholder’s agreement or the company’s articles from the outset that manages deadlock situations.

Shareholder Disputes Require Clear Communication and Resolution

Shareholder disputes are not so much a question of if but when they will happen. They can damage business operations, cause unnecessary expense, and waste time. 

Company documents must contain provisions to manage deadlock situations and a prescribed dispute process, such as mediation, so there is a transparent mechanism for handling shareholder disagreements.

We offer practical and strategic advice for shareholder agreements and the management of existing dispute situations between shareholders.

If you need help setting up a new company, drafting a comprehensive shareholder agreement, or resolving an existing dispute, contact Helix Law.