Disputes between shareholders are not uncommon. Below, we consider shareholders’ rights, and the actions a shareholder may take if they’re concerned that the actions of other shareholders or directors prejudice their shareholding.
Rights of shareholders
Shareholder rights are found in the Companies Act 2006, in a company’s articles of association or in a shareholders’ agreement. The articles of association are a public document registered at Companies House. The articles may set out how share transfers are dealt with, how new shares can be created and how the board of directors must operate. A shareholders’ agreement, being a private agreement between all or some of the shareholders, may add bespoke provisions, for example how the shareholders may vote on certain decisions or how dividends should be declared.
The Companies Act 2006 also provides rights and remedies for a shareholder in a private limited company. One of those remedies is to protect shareholders (usually those with a minority shareholding) against unfair prejudice.
If you’re a shareholder in a private limited company and you’re locked in a dispute with your fellow shareholders, your starting point would be to check the articles of association and shareholders’ agreement (if there is one) to see whether there are any provisions which help to resolve the issues. Even if there are no saving provisions in the constitutional documents, there may still be a remedy under section 994.
Dispute Resolution and removing a director
A well-drafted shareholders’ agreement may set out how disputes are resolved by including a mediation or dispute resolution clause but a clause of this type is not normally included in the articles. A dispute resolution clause provides a framework for the parties to follow in the event of a dispute and should therefore reduce the risk of a material dispute arising.
In the absence of a shareholders’ agreement, or relevant amendments to the company ’s articles, the Companies Act 2006 provides that a director can be removed from office by ordinary resolution. This means a shareholder/director holding less than 50% is at risk of being removed from office by shareholders or a shareholder with a controlling interest.
Section 994 of the Companies Act 2006 provides that minority shareholders can petition the court when the company affairs are conducted in a way which is unfairly prejudicial to them or other members. The section states that:
(1) A member of a company may apply to the court by petition for an order under this Part on the ground—
(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
Both prejudice and unfairness must be shown for relief to be granted. This means that, even if the actions are prejudicial, a remedy is only available if the actions are also unfair. Actions which have been recognised as unfairly prejudicial include:
- Breaches of fiduciary futies;
- Failure to pay dividends;
- Payment of excessive remuneration;
- Diluting the minority’s shareholding;
- Failure to abode by the articles of association or shareholders’ agreement; and
- Non-complaince with the Companies Act.
Remedies for unfair prejudice
The court has a wide discretion when considering what the appropriate remedy is. Commonly, the court will order that the unfairly prejudiced shareholders’ shares are purchased by the wrongdoing members at fair market value.
With most private limited companies, a shareholder dispute at management level will be hugely disruptive to the business and the most likely outcome will be to negotiate a share sale between the parties in dispute. Disputes are particularly problematic in family businesses or ‘quasi-partnerships’ where it is accepted that all shareholders are entitled to be involved in the management of the business.
Avoiding shareholder disputes
The easiest way to avoid shareholder disputes is to have a well-drafted shareholders’ agreement that prescribes clear direction on voting decisions, management of the board, share sales and resolutions of disputes.
At AMD, our Bristol solicitors are extremely experienced and well versed in advising clients on shareholder agreements and shareholder disputes as well as advising on corporate restructures. For more information on how AMD solicitors can help your business simply call our team on 0117 9733989 or fill out our contact form and we will get back to you as soon as possible.