Following last week’s introductory blog on shareholder disputes, we move on to consider Shareholder Agreements and how to try and avoid such conflicts.
Part 2: “Prevention is better than cure” Shareholder Agreements and avoiding conflict.
If your clients are wise enough to consult you before they go into business together recommending a written shareholders’ agreement at that stage, is usually money well spent.
The advantages of making such an agreement are obvious:
(a) it helps concentrate their minds on exactly how they want to regulate their future relationship;
(b) it makes it more difficult for one of the parties to assert later the existence of rights and obligations that are not clearly expressed in the agreement;
(c) the Court when faced with shareholder litigation tends to place significant weight on the written terms stated in the agreement.
The disadvantage in making a shareholders’ agreement is simply the initial cost but when weighed against potential litigation costs down the line it is normally insignificant.
There are relatively few reported cases dealing with litigation arising out of shareholder agreements and this is perhaps a testament to their practical use in avoiding future disputes. The Court generally starts from the position that if the parties have committed time and expense to formalising their relationship in writing then that should be respected.
This has been recognised in recent cases such as a Court of Appeal case involving a complex commercial background (Re Coroin Ltd) and in the context of family companies and joint ventures (Southern Counties Fresh Food).
It is common in a shareholders’ agreement to provide exit routes for disaffected shareholders including mandatory purchase provisions and often adopting express valuation mechanisms; and the opportunity can also be taken to include arbitration and ADR clauses and “good leaver/bad leaver” provisions.
It is therefore clear that if your clients intend to be in business together they have a golden opportunity to set out their rights and obligations clearly and in straightforward language.
Accordingly the starting point in advising clients should be the making of a shareholders’ agreement and this is certainly easier to achieve at the beginning of their relationship rather than during the life of the company.
If a client seeks your guidance after a dispute arises the best advice is to obtain a valuation of the company and consider the making of an “O’Neill v Phillips” offer.
This describes an offer by one side to the other of a buyout based on the production of a valuation by an independent valuer following submission of information by each party.
Whether the client wants to go down that route depends on numerous factors and it is important that your client decides as soon as possible on a clear strategy with a specialist solicitor to achieve separation; and crucially at what point (if any) your client should make such an offer and how it should be framed.
Written by Hugo Groves of Enterprise Chambers and Senior Partner Jeremy Boyle of Summit Law LLP.
The information and any commentary on the law contained in this article is provided free of charge for information purposes only.
No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of Summit Law LLP. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.
You are strongly advised to obtain advice from a Solicitor about your specific case or matter and not to rely on the information or comments in this article.