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When trust breaks down: shareholder disputes in owner-managed and family companies

When things are running smoothly owner-managed and family-run companies can make for particularly fulfilling working environments. But close-knit workplaces, where the relationships extend beyond pure commercial ties, are also particularly vulnerable to disputes between shareholders quickly escalating and entrenching.

However, by being aware of some of the most common issues that can arise and seeking resolution as soon as possible, it can be possible to nip any problems in the bud.

Roles, responsibilities and shareholders’ agreements

Disagreements often arise due to “blurred lines”, and particularly lack of clarity regarding roles, responsibilities, rights and objectives. It’s therefore helpful to identify, right from the start, who wears which hats – whether they are shareholders, directors, employees, consultants and so on. Articles of Association, service agreements and shareholders’ agreements can all help to define how a company is run, including who has decision making powers, voting rights and how risk and reward is allocated.

A shareholders’ agreement can be particularly helpful in ensuring that disputes between shareholders are avoided. By periodically discussing and putting a clear agreement in place that outlines roles, responsibilities and rewards, it’s easier to stay true to the business purpose – and having something in writing can provide an invaluable reference point if things do begin to deviate from what’s been agreed. Some family-run businesses will even put a ‘family charter’ in place which, while not necessarily legally binding in itself, can provide a structure should disagreements arise.

But, particularly where there are family or friendship bonds, the necessity for ensuring alignment of objectives and understandings and getting them documented can often be skipped over. The process of aligning objectives can often be seen as awkward, a demonstration of mistrust and an unnecessary expense/distraction – something similar to a “pre-nup” in the matrimonial setting. However, this can lead to misplaced assumptions and misunderstandings.   

“Unfair prejudice”

If a shareholder dispute becomes intractable and a shareholders’ agreement either does not provide an answer or does not exist, it may be necessary for shareholders to consider bringing legal proceedings under section 994 of the Companies Act 2006 to protect themselves from “unfair prejudice”.

A minority shareholder can apply to the court by “petition”, on the ground that the company’s affairs have been conducted in a way that’s unfairly prejudicial to the interests of members – or that an act or omission is or would be prejudicial. Examples can include:

  • Dominant shareholders awarding themselves excessive pay or benefits;

  • Junior ‘partners’ (e.g. in a ‘quasi-partnership’) being unfairly excluded from management – whether in terms of executive roles or particular decision-making processes;

  • Dividends being blocked;

  • Company funds or assets being misused, for example to support the shareholder dispute or for personal gain;

  • Mismanagement of the company or breaches of articles or agreements.

The Court will often look beyond the “bare bones” of what terms have been documented and take into account less formal understandings, that can often be gleaned from conduct over the years.   

Remedies

If an unfair prejudice claim is established, the court can make any order it sees fit. This could include regulating the future conduct of the company; requiring the purchase of the aggrieved party’s shares on a fair valuation; requiring the company to perform specific acts etc. However, the most typical remedy is an order that the shareholder(s) responsible for the act of unfair prejudice buys out the shares of the claimant.

Alternative remedies can include employment claims, petitioning for ‘just and equitable winding-up’ of the company under section 122(1)(g) of the Insolvency Act 1986 and “derivative actions” under sections 260-264 of Companies Act 2006.

Help with resolving a shareholder dispute

Private company shareholder disputes, particularly in a family and friendship setting, can often escalate and entrench quickly and then become difficult to untangle and resolve. They not only risk suffocating the business of the company, but can also lead to disproportionate time and expense and the permanent breakdown of relationships.

Thankfully, there are plenty of options available for resolving disputes and the underlying commercial issues – and we can help you find a workable strategic solution to protect your rights, commercial objectives and preserve your relationships. In many cases we can help you guide the issues to a practical conclusion without even “putting our head over the parapet”.  For an early confidential no-obligation discussion, get in touch with a member of our team.