Avoiding a director or shareholder disputeConflicts between directors or shareholders can arise for many reasons. When they do, it’s important to understand the legal rights of all parties and the options available as well as the consequences of allowing things to get worse. We look at how to avoid a company or shareholder dispute, or at least settle the issues before relations deteriorate too far.
In company law, a minority shareholder (i.e. anyone with 49% or less) has minimal influence over the management of the company. Unfortunately, neither the standard constitution of a company or rules under the Companies Act give much protection to a minority shareholder.
Differences can arise as businesses evolve and personal circumstances change. For example:
- there may be differences on strategy or the direction of the company
- power struggles and poor personal relationships may develop
- shareholders may look to retire or
- disagreements occur on service contracts and remuneration.
As a result, there are ways to protect the minority shareholder’s interests; either by agreement with the other shareholders or, as a last resort, by taking action through the courts. Therefore, bearing in mind the difficulties that can arise, it is always advisable to consider these scenarios at the beginning.
A shareholder agreement is a must for a private company; especially where there are a relatively small number of shareholders who also manage the business. Often minority shareholders need to press for a shareholder agreement. It is advisable to proactively pursue this as part of the start up of the business. Failing that, you should put it at the top of the agenda.
The process of preparing an agreement can assist shareholders to address points which could become potential problems. This encourages the key players to work through any issues early, when everyone is positive and communications are good.
If a shareholder agreement is not dealt with, the shareholders run the risk of the expense and uncertainty of going to court later. Where there is a shareholder agreement, everyone’s position is clear. It can reduce the risk of conflicts arising or getting out of hand.
Do note that a shareholder agreement is confidential and does not have to be filed at Companies House. It is a private document between the shareholders.
What should I include in the shareholder agreement?
Shareholder agreements can go a long way to ensuring disputes are avoided. If not, they can at least provide a mechanism that allows such disputes to be settled quickly. An agreement identifies shareholders’ specific responsibilities and outlines how and where disputes are to be resolved.
Amongst other things, the agreement can cover points such as:
- key objectives
- finance and borrowing
- dividends, directors’ fees and salaries / profit distribution
- controls on the appointment of directors
- major expenditure
- exit mechanisms – for shareholder deaths, misconduct, divorce, incapacity, etc
- fair valuation process for transfer of shares
- succession arrangements – insurance of key persons and
- dispute resolution.
We would advise all companies to draw up a shareholder agreement. It will make the various parties’ rights and obligations clear; set out a dispute resolution process; and set out how to deal with potential issues that might arise, therefore reducing the risk of litigation down the line. In our next article, we look at the various ways of resolving shareholder disputes if they do arise.