Early Stage Essentials for approaching a Shareholder Dispute

A dispute with fellow shareholders can sometimes be like a commercial divorce.  Perfectly sensible and commercial people can lose all clarity in a shareholder dispute.  It is therefore important to keep cool in such circumstances, because actions taken in the heat of the moment when emotions are running high may come back to bite you later in litigation.  Angry emails, threats, non-business related expenses and general unreasonable behaviour can all be dredged up later and relied upon by an opposing party.  It is also likely to add to already toxic nature of the situation, ultimately to the detriment of the business and destroying value.  Unless an immediate response or action is required, it always better to wait 24 hours in order to take a more measured commercial approach.

The first step in any shareholder dispute is to identify whether a written shareholders’ agreement exists.  A shareholder agreement regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection afforded to the shareholders.  The shareholder agreement will help guide you on your rights and the dispute management process.  Another document that might be helpful and provide similar information, whether a shareholder agreement exists or not, is the Articles of Association.

It is important to identify any important documents (for example emails and board minutes) that may record how the shareholders have agreed to regulate, manage and conduct themselves.  These documents could be important, particularly later in litigation. In the same vein, you should write down recollections of any meetings or conversations relevant to the dispute, recording dates and times if possible. Over time, recollections can become hazy or even forgotten, so it is better to make a note early on.

Many shareholder disputes are based on a simple divergence over business strategies, however in other cases the dispute can be based on personal disagreements and emotive decision-making. Where applicable, it is important to recognise this fact. Whilst personal disagreements lead to some of the most bitter and protracted legal disputes, they can also on occasion be amongst the quickest and easiest to resolve where they are addressed head-on. For example, a failure to convene shareholder meetings properly can be viewed by minority shareholders as a personal slight on their perceived lack of importance. By recognising this, majority shareholders can take quick steps to heal and steer clear of such divides, whilst also avoiding very real legal risks which would otherwise arise on these facts.

If you are a director and a shareholder, you should make sure that any actions or decisions you take are not in breach of your legal duties as a director. The Companies Act 2006 places numerous duties on directors, including the requirement to act in the best interests of the company and to avoid conflicts of interest. In a shareholder dispute, particularly in a private company it is common for an individual who is both a shareholder and director to encounter problems around decision making due to conflicts of interest.  The problems can be solved by paying careful attention to the company’s constitutional documents, declaring conflicts, forming board sub-committees and taking professional advice.

It is imperative to seek early legal advice from a lawyer specialising in shareholder disputes.  Early advice will greatly assist in working out your legal position and setting out a strategy to achieve a successful outcome in the dispute.  Fighting a dispute without good legal advice can lead to increased stress and / or mistakes being made and /or focusing on issues that might seem important, but ultimately have no legal or commercial weight.

Sometimes you find a director obtaining personal legal advice using the company lawyers (and more often than not, using company money to pay the fees for that advice).  This can be a big mistake.  The worst case scenario being that advice becomes available to whole board.  You should therefore take care to agree a retainer with your lawyer that keeps the advice you receive confidential.

Dispute resolution should form part of any litigation strategy. If negotiations between the parties fail, a mediation is a worthwhile exercise and is something that the courts actively encourage.  At a mediation, a neutral third party (usually a lawyer) assists parties to work towards a negotiated settlement of their dispute, with the parties retaining control of the decision on whether or not to settle.  A mediation can be a very effective way of settling a dispute, avoiding lengthy and expensive court proceedings.

To book a free consultation with one of our team, contact us at +44 (0)203 9622 230.

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