EveryMonth (May 2010): How should you handle a Shareholder Dispute?

If you are unfortunate enough to be involved in a shareholders’ dispute, legal issues are likely to be only part of the mix, especially if yours is a family business. You need advisers who are sensitive about both the business and people issues and take these into account in finding a workable solution.

The starting point: do your homework

You, your fellow shareholders, and those advising you, need to be well prepared. Start by examining the Statutory Books to establish ownership of the company. Also check carefully the company’s Articles of Association and any Shareholders’ Agreement.

Why are the statutory books so important?

The Statutory Books determine who the members are – and only legally recognised members can vote. Every company must keep these books, which should contain a Register of Directors, the Register of Allotments and Register of Members. Check these for the identity of the shareholders and the number and class of shares held.

What should you be looking for in the Articles of Association?

The Articles of Association will tell you how many directors are needed for a Board Meeting to be held, and how many members for a members’ meeting. Without this specified number (the ‘quorum’) present the meeting will be legally ineffective.

Check also for any special rules for appointing and removing directors. The general law stipulates that a director may be removed by an ordinary resolution – a resolution passed by a simple majority of shareholders – but sometimes the Articles give a person who holds a specified proportion of the shares the right to appoint and remove directors.

The Articles of Association of older companies may require one third of the Directors to retire at each Annual General Meeting. If AGMs have not always been held, this may cause problems.

Sometimes someone has been appointed Chairman and has a second or casting vote at meetings – to find out, check the minute books of Board and General Meetings. This could be crucial to effective decision making with a deadlocked or split Board. However, for companies incorporated after 1 October 2007 there cannot be a casting vote at General Meetings.

How might things be affected if you have a Shareholders’ Agreement?

A Shareholders’ Agreement can stipulate matters requiring the consent of a specified proportion of members even if the general law or the Articles say otherwise. However while a Shareholders’ Agreement imposes binding obligations on the members, a director’s statutory duties may mean he has competing legal obligations.

A Shareholder’s Agreement or the Articles may contain the right to compel a departing employee-shareholder to sell his shares, and may distinguish between good leavers and bad leavers with significantly different prices to be paid for their shares. A company with these clauses in its constitution may be in a strong position to resolve a dispute with a minority employee-shareholder but only if it has the funds to buy them out.

What about the risk of legal proceedings?

Legal action is frequently threatened but very rarely followed through, since these proceedings are very costly and disruptive to a small company. So don’t allow yourself to be bullied by an aggressive and well advised minority shareholder.

If legal proceedings are issued they generally do not go to a full hearing. Even so we recommend you try very hard to settle any dispute amicably: if legal proceedings are issued a resolution may be much more difficult to achieve. If you are unlucky enough to be on the receiving end of legal action, consider a tactical offer to buy shares at fair value.

In conclusion…

Shareholder disputes are among the most challenging areas of work for legal advisers. You should involve experienced and skilled advisers to find solutions that reflect business issues first and personal objectives second. Beware of advisers who can’t see or don’t care about the bigger corporate picture!

Would you like some more information or advice on this topic? Download a more detailed fact sheet from our website, or call us for some initial advice about your situation. Contact James Hunt on 0845 868 0962 or email