Shareholder Disputes: A Guide

In general, shareholder disputes can happen for a variety of reasons. Common examples include situations where a majority shareholder is blocked from doing something by the minority shareholders, or a minority shareholder experiences pressure from the majority to agree to things that they don’t inherently align with.

Shareholder disputes can be a challenging and complex matter for companies incorporated in England and Wales. These conflicts of interest among shareholders have the potential to disrupt business operations, damage relationships, and impede growth.

In this blog post, Asim Din, Commercial Dispute Resolution specialist, looks at the legal landscape surrounding shareholder disputes in England and Wales, exploring the key aspects, legal remedies, and dispute resolution mechanisms available.

Shareholder rights

In England and Wales, shareholders possess certain fundamental rights that are protected by law. These rights include, but are not limited to, the following:

Voting Rights: Shareholders have the right to vote on important company matters, such as the election of directors or major corporate decisions.
Inspection Rights: Shareholders are entitled to inspect the company’s books and records to ensure transparency and accountability.
Dividend Rights: Shareholders have the right to receive dividends, subject to the company’s profitability and board discretion.

Shareholder obligations

While shareholders enjoy certain rights, they also bear obligations towards the company and fellow shareholders. Key obligations include:

Fiduciary Duties: Shareholders owe a fiduciary duty to act in the best interests of the company, avoiding conflicts of interest and exercising their powers responsibly.
Non-Compete and Non-Disclosure Obligations: Shareholders are typically bound by non-compete and non-disclosure agreements, preventing them from engaging in activities detrimental to the company or disclosing sensitive information.

Common causes of shareholder disputes

Shareholder disputes can arise from a variety of factors, including:

Mismanagement and breach of fiduciary duties

Conflicts often emerge when shareholders perceive mismanagement or breach of fiduciary duties by directors or other shareholders. These disputes may involve allegations of self-dealing, improper diversion of company assets, or failure to act in the best interests of the company.

Shareholder oppression

Shareholder oppression occurs when the majority shareholders abuse their power to prejudice the interests of minority shareholders, often resulting in disputes over the payment of dividends, exclusion from decision-making processes, or denial of access to company information.

Breach of shareholders’ agreement or articles of association

Disagreements can arise from breaches of shareholders’ agreements or articles of association. These documents govern the relationship between shareholders and outline procedures for decision-making, transfer of shares, or dispute resolution mechanisms. In this case, the articles of association would need to be amended.

Consequences of shareholder disputes

Shareholder disputes can have a number of consequences, including:

Financial loss:Shareholder disputes can be very costly, both in terms of legal fees and lost profits.
Damage to the company’s reputation:Shareholder disputes can damage the company’s reputation, making it more difficult to attract customers, investors, and employees.
Disruption to the company’s business:Shareholder disputes can disrupt the company’s business, making it difficult to operate efficiently and effectively.
Loss of shareholder confidence:Shareholder disputes can lead to a loss of confidence among shareholders, which can make it difficult for the company to raise capital or attract new investors.

Legal remedies for shareholder disputes

When shareholder disputes arise, several legal remedies are available under English and Welsh law, including:

Derivative Actions

Shareholders can bring claims on behalf of the company against directors or other parties for wrongdoing that harms the company. Derivative actions aim to ensure corporate accountability and protect the company’s interests when its directors fail to take appropriate action.

To initiate a derivative action, certain requirements must be met, including acting in good faith, obtaining court leave, and proceeding if the company refuses to bring the claim itself. Successful derivative actions can result in various remedies, such as damages, injunctive relief, or corporate governance reforms.

Unfair Prejudice

Minority shareholders can seek redress under Section 994 of the Companies Act 2006 when their rights and interests have been unfairly disregarded or prejudiced by majority shareholders or the company itself. Unfair prejudice actions aim to maintain fairness and protect minority shareholders from abusive conduct.

To bring an unfair prejudice claim, shareholders must establish certain elements, including shareholder status, unfair prejudice, and a relationship of confidence and good faith. If unfair prejudice is proven, the court has discretionary powers to grant remedies, such as share buyouts, restraints on conduct, or corporate governance changes.

Winding Up

In extreme cases where the company’s affairs cannot be rectified, shareholders can apply for a wind up petition to close down company. This involves liquidation and distribution of assets, providing an exit strategy for dissatisfied shareholders.

Dispute Resolution Mechanisms

Recognising the importance of preserving business relationships, alternative dispute resolution mechanisms are often preferred in shareholder disputes. These mechanisms include:

Mediation

Mediation involves a neutral third party facilitating negotiations between shareholders to reach a mutually agreeable resolution. It allows parties to control the outcome and avoid the costs and adversarial nature of court proceedings.

Arbitration

Arbitration is a private, binding process used to resolve a shareholder dispute by means of an independent arbitrator or panel. It offers flexibility, confidentiality, and a final and enforceable decision, while allowing parties to select an arbitrator with expertise in corporate matters.

Court Litigation

If alternative dispute resolution fails or is not suitable, shareholders can resort to court litigation. This formal process involves presenting evidence and legal arguments before a judge, who will render a decision based on applicable law and the facts presented.

How can Butcher & Barlow help?

Shareholder disputes in England and Wales can significantly impact the stability and prosperity of companies. Understanding the legal framework, shareholder rights and obligations, available remedies, and dispute resolution mechanisms is crucial for all parties involved.

By navigating these complexities effectively, companies can preserve their integrity, protect shareholder interests, and foster a healthy and productive business environment.

Contacting Butcher & Barlow for advice at the slightest hint of a dispute could prevent the parties getting to a point where there is no other option than to initiate court proceedings, which is more often than not a costly and time-consuming process for all involved.

Furthermore, making sure you have a Shareholder Agreement in place can reduce the risk of dispute arising. Our Corporate & Commercial team can carry out a review of your agreements to make sure that they are watertight. You can find out more about Shareholder Agreements in this blog: 10 Reasons why you need a shareholders agreement.

For an initial no obligation chat regarding any potential business dispute, contact Asim Din on or email adin@butcher-barlow.co.uk.

Asim Din