Common types of shareholder dispute
The court will not interfere in the matters of commercial judgment. Rather, the law looks at ‘unfair prejudice’. It difficult to claim something is unfair when all shareholders are treated equally. But if some or all members are treated differently, it can lead to a shareholder dispute.
You might be wondering about the different types of shareholder dispute. As solicitors who specialise in this field, we have worked with clients in a wide range of situations. Here are some of the typical disputes that might arise between shareholders.
Shareholders fall out
Shareholders are people too. People sometimes disagree, or become jealous of each other. Communication can break down, and – ultimately – the relationship can fail completely. Until the dispute is resolved, it becomes impossible to continue to run the company effectively.
Example
- A coffee shop went into liquidation because one director’s wife used to interfere in the business even though she wasn’t a shareholder herself. The other directors decided they just couldn’t work together any more.
Directors act in breach
Director behaviour should be set out in the shareholder agreement and Articles of Association. If a director breaches either agreement, it can lead to a dispute with their fellow directors.
Payment policies are unfair
If one director finds out that others are being paid more, and there is no good reason for this, it is likely to give rise to a dispute.
For example, a main shareholder might draw a salary or dividends for themselves only, meaning they receive excess remuneration. Alternatively, they might divert business to competing entities that they control. This is a conflict of interest because it negatively impacts the income of their fellow shareholders.
Minority shareholders are not kept informed
All shareholders should be kept informed about the financial affairs of the company. It can be tempting for majority shareholders to make all the decisions without consulting minority shareholders equally.
Minority shareholders own less than 50% of the business. However, if minority shareholders are excluded from meetings where they have a legitimate interest, this is an abuse of power by majority shareholders, and a dispute can arise.
Example
- One director sacked staff without consulting the others
What this means to you
It is hard to remember dates and details of oral agreements with any accuracy, and it reduces your chances of winning your case when there is no written record.
It’s therefore critically important to keep written records.
The Articles of Association contain the purpose of the company and the duties, responsibilities, rights and obligations of the members. It’s an important document that should be filed with the Registrar of Companies to protect the shareholders’ investment and relationships.
In addition, the shareholder agreement explains everybody’s rights, so there is less room for error.
Of course, we can help with that. We can also help if things have gone wrong.
Example
- We dealt with a client who was suffering from burnout. He didn’t want to participate in the business any more, so he gave 50% of his shares to a colleague. Later, she accused him of being lazy, and they fell out. However, the share handover was never documented in an agreement, so it couldn’t be proved. The solution was to go through all their old emails to find what was agreed.
If you’d like more information on shareholder disputes, please call us on 020 7467 3980. We’ll be happy to help.