Shareholder disputes can be disruptive to a company, diverting management attention from the business and potentially damaging its reputation.
Putting the right framework in place to avoid disputes will not only help prevent shareholders from being disgruntled but can also make a company a more attractive proposition should it ever want to seek investment or new ownership.
The most effective way of avoiding disagreement is by putting a strong shareholder agreement in place which seeks to cover all eventualities. This means that everyone involved should understand their rights which would make a dispute less likely.
The agreement should be tailored to the unique requirements of an individual business, but would usually include the following provisions:
If shareholders are not directors of the company, they may want some say in certain company decisions. For example, they may want to be able to vote on large expenditure, expansion or the appointment of new directors or be able to veto a merger or acquisition.
The shareholders’ agreement can set out any voting rights that are given to shareholders and shareholdings can be structured in such a way as to avoid deadlock.
Shares can be apportioned in accordance with the contribution that has been made to the business, giving rights to those holding more shares or to those with a certain type of share. Dividends may be payable to shareholders and voting rights can also be given.
Certain issues may require the approval of a specified majority of shareholders, for example, two-thirds, or unanimous consent could be required to remove a director. By addressing these considerations at the time, the agreement is drawn up, shareholders are less likely to be able to raise an issue later on if they have previously agreed to it.
Disposal of shares offers scope for difficulties if there is a danger that shares could be sold to a third party against the wishes of other shareholders and those directly involved in the business.
The shareholders’ agreement can contain restrictions in respect of the disposal of shares, such as requiring them to be offered to existing shareholders and/or directors first. An agreed method of share valuation should also be included to prevent a dispute over the price.
Shares would normally be offered to existing shareholders on a pro-rata basis to avoid changing the balance of power and rights. For instance, if three shareholders hold an equal number of shares and one decides to sell, the agreement could require that the remaining two shareholders have the right of first refusal over half each.
Provisions for forcing a shareholder to sell shares is also usually included so that if a shareholder has behaved inappropriately, such as by damaging the business, becoming insolvent or failing to comply with the shareholders’ agreement, there can be a forceable acquisition of their shares.
Minority shareholders can be required to join in with majority shareholders in the event of a sale so that the sale of all shares of a company can go ahead and those with a small number of shares cannot withhold them or prevent the sale or make the business a less attractive proposition.
Shareholders can be prevented from competing with the company while they are shareholders and for a reasonable time after they dispose of their shareholding. This can include preventing them from setting up in competition within a certain radius of the business or soliciting the company’s business, clients or other connections.
In the event of a deadlock over a shareholder decision, deadlock provisions will set out how this can be dealt with to avoid the business being damaged by the inability of shareholders to agree on a way forward. This can include buy-back provisions, allowing a shareholder to sell their shares.
This is a vital clause for the agreement, governing how a dispute will be dealt with. Generally, it will start with the requirement for the parties to enter into mediation in the hopes that a mutually agreeable solution can be found.
Mediation has the advantage of being quicker and more cost-effective than litigation and can also help rebuild the parties’ relationship so that they can continue in business together.
Seeking outside help early on if a disagreement arises between shareholders is always advisable. An experienced commercial solicitor will be able to suggest solutions that might not be apparent to those involved and can guide shareholders and directors through difficulties before their positions become entrenched.
If a dispute is allowed to become ongoing, then those involved may well find it harder to back down and relationships could be damaged to such an extent that they cannot be salvaged. During this time, it is likely that a business will suffer as time and energy is leached away to focus on the disagreement, rather than achieving commercial goals.
While the contents of a shareholders’ agreement are not usually at the top of the list when a business is being set up, further down the line they could be absolutely vital in safeguarding interests and preventing disagreements.
Even if shareholders decide to sell up and leave a business, where the process for doing this has been carefully thought out beforehand, an organisation can not only be protected but should continue to run smoothly while the transfer takes place.
A business will always experience changes over time and anticipating and planning for these will make it as robust as possible. It will also help the mindset of those involved to know exactly what to expect, should they have an issue they need to raise or if they wish to take or challenge a major decision.
While it is impossible to anticipate exactly what an enterprise will face in the future, it is the job of a well-drafted shareholders’ agreement to cover most eventualities and protect a company and its owners as far as possible.
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If you would like to talk to one of our expert legal team about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 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.