Top 3 ways to resolve a shareholder dispute
When you first set up your shareholder agreement, you probably never imagined that anything would ever go wrong. Sadly, life isn’t like that, and there can be many bumpy relationships and hurdles along the road.
For example, the majority shareholder might start diverting business to another company in which they hold an interest, so you miss out on profits that should rightfully come your way.
Or the majority shareholder might decide to award themselves an excessive financial benefit.
Or you might suddenly find yourself excluded from important meetings in which you would have expected to participate.
As solicitors who specialise in shareholder disputes, it’s surprising how many times these situations arise.
What the law says
If you’re a shareholder, you’re protected against unfair prejudice under section 994 of the Companies Act 2006.
That means, for your claim to win, the conduct must be both unfair and prejudicial or harmful to your interests.
We’ll write another article in future to define what counts as unfair and prejudicial. Meanwhile, if you have any questions, just give us a call.
We hope you never find yourself involved in a shareholder dispute, but if you do, here are the main points to consider:
If you feel the majority shareholder has treated you unfairly, you need to keep notes as you go along. This is because it’s hard to remember later exactly what happened and who said what and when. When you keep detailed notes, it builds up into a pack of evidence that could well be extremely useful later on.
Understand the value
You need to understand the value of your shareholding. For this, you need an accountant who has expertise in shareholder valuations.
Not only will an accountant be able to provide advice on valuation, but they will also be able to discuss the tax consequences or relief available.
If they have experience of giving evidence in court, then all the better (just in case mediation does not work).
If your case proceeds to trial and the court orders a share buy-out, a purchase price needs to be agreed. The date the shares are valued is therefore a critical question
This issue arose in a 2014 case involving a disagreement over the ownership and management of two linked family businesses. The judge considered seven potential dates for the valuation, and eventually found that the valuation should take place at the date of the order for purchase. That date happened to have the advantage of certainty and was the most fair out of all the possible valuation dates.
If you don’t know an accountant with the right expertise, try the Academy of Experts or ask us to suggest some experienced accountants we know.
When you’re in a dispute with your fellow shareholders, the main thing is to seek expert advice. Don’t try to sort it out yourself, because that can lead you into even more trouble.
First, you might consider mediation, also known as Alternative Dispute Resolution (ADR). As you may know, the courts actively encourage claimants to explore ADR before court proceedings are issued.
If mediation can settle the dispute, the advantage is that it saves on lawyer’s fees.
On the other hand, mediation doesn’t always work. For example, we are currently working with a client who spent over two years in mediation, trying to resolve a shareholder dispute. However, the process failed, and he ended up instructing us.
Ultimately, you really need a solicitor who specialises in shareholder disputes (such as Summit Law LLP, hint, hint!)
Solicitors like us can use tactical tools such as Part 36 offers which can put the recipient shareholder under pressure to accept. This is when we offer to settle the claim for a specific amount without incurring court costs and interest.
Don’t wait too long
I know we promised you three tips in the headline, but here’s a bonus fourth tip (just like the added value you get when you instruct Summit Law!)
Don’t delay. The chances are that, if things are left in abeyance, matters will only get worse with the parties becoming increasingly frustrated with one another.
Try and identify areas where you agree and disagree. Find some middle ground. Could a mediator assist you to unlock the impasse? If not, you’ll need to find a specialist solicitor.
It is also worth remembering that, whilst there is no limitation period to use the unfair prejudice procedure, the court does expect shareholders to ‘get on’ with their petition and not leave it for years before complaining (this happened in one well-known case where the shareholder waited nine years!)
If you’d like more information on shareholder disputes, please call us on 020 7467 3980 or make an online enquiry We’ll be happy to help.