Most common shareholder disputes and how to resolve them

It’s a familiar story in the music world; a bunch of people get together to form a band. They struggle in anonymity and relative poverty for years while gigging away in obscure and scattered venues until, one day, they make a breakthrough, become famous, globally-recognised, super-rich and idolised by an army of adoring followers. But money and adulation take their toll and, usually at the height of the band’s popularity, they announce that they are splitting up due to “artistic differences, man”. Things are never the same again.

Bands are like companies and companies are like bands

These sorry tales are not confined to the world of entertainment. After all, what is a band except a company that produces music to sell to the public for profit. More overtly, commercial organisations often go through the same arc from formation through obscurity and struggle before eventually breaking out onto the sunlit uplands of success. Just like that once-struggling rock band, it’s money and success that cause the friction that can eventually spill over into a full-fledged dispute.

What are shareholders and why do they matter?

The shareholders, also known as members, are the people who own the company. A shareholder may also be a director and an employee or both. Each shareholder owns a portion of shares, commonly known as a “stake”, which entitles that member to propose resolutions, attend shareholder meetings and receive dividends, i.e., a pro-rata share of any profits made by the company.

Company governance is similar to that of democratic countries, which is to say, the majority rules. Most decisions require a simple majority vote of at least 50%+1 of the shares, so any individual or bloc that controls that proportion can usually get their way. Hence, they are known as the majority shareholders.

Most common sources of dispute

A full-blown row may begin as a mere difference of opinion. It’s rare to have conformity of opinion among groups of, say, three or more people in any situation. Where money is at stake, those tiny differences can soon snowball into a damaging and, sometimes paralysing, conflict. That said, the most common causes of conflict, in no particular order, are:

1. Company policy or strategy

For example, the company needs a cash injection. Do they seek equity financing or debt financing? Equity financing is an option that has the potential for major friction as existing shareholders must agree to dilute their shareholding.

2. Company management and/or administration

This often crystallises in the form of complaints about shareholders not being provided with sufficient information about the company’s accounts or affairs. Poor staff management is another oft-levelled complaint.

3. An alleged lack of respect for minority shareholders

Despite the fact that minority shareholders do enjoy certain basic statutory rights, many disputes arise from minority shareholders believing that their rights or views are being ignored or even contravened by the board or that the majority are abusing the minority’s rights.

4. Breaches of fiduciary duties

Shareholders are required to deal with each other and the company in an open and honest manner. This is particularly true of majority shareholders in dealing with minority shareholders. Majority shareholders are sometimes accused of withholding vital information or acting in cases where there is a conflict of interest.

5. Personal problems and/or antipathy

It is not unusual to dig into the causes of a dispute and find that the issue that lies at the root of it is nothing more sensational than a clash of personalities. Egos and the reluctance to “lose face” can and often do aggravate otherwise solvable issues into costly and seemingly impassable altercations.

How can these disputes be solved?

There is always the option of taking the dispute to Court but any good professional adviser will say that this is really and truly a “nuclear option” and best avoided. It is always ruinously expensive for all concerned and often creates more problems than it cures. Fortunately, other less traumatic solutions exist.

First of all, the company should carefully check the terms of the shareholder’s agreement and the articles of association. If they have been thoughtfully and professionally drafted then they will often provide a non-nuclear answer and way forward. However, if that fails, then the following steps could be applied:

• Pass a resolution to hold a general meeting where the problem can be thrashed out. Basically, lock everyone in a room until a solution to the impasse is found. This can often be the cheapest and most effective tactic.
• Appoint a disinterested director to the board from outside the company, perhaps as a non-executive director, to bring a fresh perspective and maybe break a deadlock.
• Seek an objective and experienced outside mediator to help resolve the dispute. A professional mediator can often find ways to defuse tensions and bring the parties to a resolution of sorts. Nobody gets exactly what they want but everyone gets something they can live with.
• If any particular shareholder proves to be implacable, then consider the option of seeking an outside party to buy out their shareholding. This must be done in accordance with the terms set out in the articles and any shareholder’s agreement.
• As a last resort, consider selling the company or, if a buyer cannot be found, then petition the court to have the company wound up. Clearly, these steps are far from ideal and represent another “nuclear” option but, if all else fails, it may be more sensible and expedient than a protracted court claim.

Provided there is some remaining grasp of reason among the members, then steps A to C above will provide a way to cut the Gordian knot of most disputes, following which the company can move forward by “getting the old band back together, man”.

For further information and trusted legal advice regarding shareholder disputes and other corporate matters, get in touch with us at Carlsons Solicitors.