While minority shareholders have limited powers under the terms of the Companies Act 2006, a dispute can cause substantial disruption to a company if it is not dealt with promptly.
Disagreements can arise when shareholders object to a certain course of action, when they believe that directors are overstepping their authority or where they simply feel that their views are not being taken into account.
Failure to address the situation will often make it worse, with discord spreading and positions becoming entrenched.
Basic rights are given to shareholders under the terms of the Companies Act 2006 in accordance with the number of shares held. Those with a 5 per cent holding can require the circulation of a written resolution, the calling of a general meeting and the prevention of deemed reappointment of an auditor.
A shareholding of 10 per cent allows shareholders to call a poll vote at a general meeting and to require an audit to take place, while a 25 per cent holding gives the power to block a special resolution or a compromise arrangement.
Shareholders also have a pre-emptive right of first refusal to buy new shares when they are issued, unless this has been specifically removed in the shareholders’ agreement. The offer for sale must be on the same or more favourable terms as any offer that will be made to other parties.
More rights may be given under a shareholders’ agreement if there is one, or the company’s articles. For example, a power of veto can give minority shareholders the ability to stop certain transactions such as sales, mergers, substantial expenditure or investment, taking on new business, selling shares without offering to buy minority shares and entering into voluntary liquidation. Or the agreement can confer the right to approve the appointment of a new director or access to financial documentation.
Ideally, these extra rights should be in place from the start as it is difficult to amend or add rights later on and if a dispute has arisen it is unlikely that minority shareholders will be given more power at that stage.
There are many advantages to resolving a dispute without resorting to litigation. A court battle can be time-consuming and disruptive for those involved and damaging to reputations.
Finding an acceptable alternative solution is not only quicker and cheaper but gives those involved a better chance of continuing in a beneficial commercial relationship.
Early intervention is important, to address the issue before it escalates.
By calling a general meeting, shareholders can propose a resolution for tabling and discussion. As well as the chance of winning a vote in respect of the resolution, this also allows the subject to be aired in front of all shareholders and it may be enough to resolve the disagreement.
If the company has a chairman, board director or non-executive director who is not involved in the dispute or in day-to-day company business, they may be willing to step in and chair open discussions between the parties to try and reach a satisfactory outcome. If the company does not have anyone in this role, the appointment of a new director or advisor may help, with a new perspective helping to move the situation forward.
The minority shareholder may wish to be bought out of their holding and acceptable terms could be negotiated allowing them to exit the company, with other shareholders or the company itself purchasing their holding. Any deal should be put into writing by legal representatives to ensure that the transaction is clearly set out and adhered to by those involved.
Alternatively, removing a director may be an option, although there are strict protocols which must be observed and it is advisable to seek legal input before proceeding. Shareholders will also need a minimum of half of the votes cast.
If the matter cannot easily be resolved, alternative dispute resolution offers the chance to be guided by an expert. This includes mediation, where the parties will be helped to find their own mutually acceptable answer to the dispute. As well as avoiding the expense and disruption of court, a mediated outcome can also help to repair the parties’ relationship.
Mediation is a method of alternative dispute resolution where a neutral third party known as a mediator works with the parties to assist them in trying to reach a settlement. Mediation is all but compulsory and if proceedings are issued which leads to a trial, a party may be penalised for adverse costs if they unreasonably refused to mediate even if they win their case.
S.994 petition for unfair prejudice
If shareholders believe that the company is being run in a way which is unfairly prejudicial to the member’s interests, then an application can be made to the court under s.994 of the Companies Act 2006. The act complained of needs to be both unfair and prejudicial, such as a breach of fiduciary duty, mismanagement or a breach of the terms of the shareholders’ agreement.
If the petition is successful, the court has a number of options open to it, as follows:
· A minimum shareholder can be allowed to resign, with their shares being bought by the company or other shareholders;
· The company can be prevented from taking certain actions;
· An order can be made requiring the company to bring civil proceedings with a view to further redress;
· Changes to the articles can be prevented;
· A petition for the company to be wound up can be ordered.
In addition to an unfair prejudice petition, a shareholder may also consider bringing a derivative claim or a winding up petition on just and equitable ground. For further details, please read Shareholder Remedies: Unfair Prejudice Petition.
At its worst, a shareholder dispute can end in a company being sold or wound up. By looking for solutions early on, those involved have the best possible chance of finding a solution that allows
them to move past difficulties to focus their energies on building the business and achieving commercial goals.
When a disagreement appears to have reached a sticking point, a good first step is to involve an expert commercial solicitor in looking at the situation and offering advice and guidance. At Lincoln & Rowe, we have an in-depth understanding of business relationships and we frequently help our clients in negotiating acceptable solutions to difficulties.
Often someone with a new perspective can come up with the right answer or help those involved see the bigger picture and reach a compromise agreement or a solution that lets you refocus on your company and put difficulties behind you.
Get in touch with us
We are pleased to announce that we have won the Global Awards by ACQ5 award for Best Firm for Commercial Disputes London 2023. We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at enquiries@lincolnandrowe.com or fill in our contact form and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.
