Resolving Shareholder Disputes

'Resolving Shareholder Disputes'

We have discussed resolving board disputes here: https://brodies.com/insights/corporate/a-handy-guide-to-resolving-board-disputes/

More fundamental shareholder disputes can often arise for a wide range of reasons, with some examples including: shareholders feeling like the affairs of the company are being conducted improperly, disagreements over how the company is being run, or even misappropriation of company funds.

Ideally, any disputes between shareholders should be dealt with during shareholder meetings. However, where concerns are not properly addressed at these meetings, other avenues may need to be explored. To identify the options available to the shareholders, parties should check (i) the company's articles of association and (ii) the shareholders' agreement (if there is one). Beyond this, shareholders should look to the Companies Act 2006 (the "Act") which provides guidance as to how shareholders can resolve disputes.

Statutory Rights

Shareholders have certain statutory rights under the Act that can be of some assistance in resolving disputes. For example, shareholders have the right to require the company to call a general meeting. Sometimes these rights can be sufficient to rectify the disagreement. This is especially so if the articles of association and any shareholders' agreement have adequate provision for voting, intervention by the chair or dispute resolution. However, in some circumstances it might be necessary to explore further options.

Section 994 – the statutory remedy:

As a consequence of the dispute, shareholders (particularly minority shareholders) can feel unfairly prejudiced and excluded from the affairs and decision making of the company. Fortunately, the Act provides means of protection in these circumstances. Section 994 of the Act acts as a statutory remedy for shareholders who are unfairly prejudiced. Under section 994 of the Act, a shareholder may petition the court where a company's affairs are being conducted in a manner that is unfairly prejudicial towards some or all of its members and their interests. There is no simple definition of what constitutes 'unfair prejudice', and the court has a wide discretion in their application. A key consideration to note however, is that the court applies equal weight to both parts of the wording. As such, no matter how prejudicial an action is, if it is not deemed to be unfair in the circumstances, there will be no right of remedy available to the aggrieved shareholder.

Some situations where the courts have found there to be unfair prejudice include:

• Misappropriation of company business or assets;
• Mismanagement of company affairs; and
• Failure to pay dividends or paying excessive dividends.

Section 996 – court remedies:

Section 996 of the Act affords the court wide powers to grant remedies to shareholders whose interests have been unfairly prejudiced. If the court is satisfied that the petition made by the shareholders is "well founded", it has the power to make any order that it determines is sufficient to provide relief in response to the unfair prejudice suffered. The purchase of the shares by the wrongdoer (usually a majority shareholder) or by the company itself (share buyback) is the most commonly sought and granted remedy. Some of the court's other remedial actions can include:

• Regulating the conduct of the company and the management of its affairs in the future;
• Requiring the company to refrain from continuing to act in an unfairly prejudicial manner or in contrast, if by omission the company has failed to act then they must act;
• Authorise civil proceedings to be brought on behalf of the company;
• Prohibit the company from altering its articles without consent of the court; or
• In extreme circumstances, the just and equitable winding up of the company.

Avoiding shareholder disputes

Undertaking unfair prejudice proceedings can be a lengthy and expensive process, and it is useful to bear in mind that potential shareholder disputes can be avoided by putting in place a shareholders' agreement. A shareholders' agreement is a contract among all or some of the shareholders and (if appropriate) the company itself. It can deal with some or all aspects of the relationship between the parties including the personal rights and obligations of the shareholders. It will reflect the parties' intentions as to how the company will be managed and run. A shareholders' agreement can prevent, or provide a means of resolving, disputes that might arise. Implementing a shareholders' agreement is simple and relatively inexpensive in comparison with the cost of resolving a dispute in the absence of any agreement.

If you believe you require or are a seeking to implement a shareholders' agreement, please contact a member of our Corporate team. If you need assistance in a live dispute, please contact a member of our Litigation team (or your usual Brodies contact).