Shareholder Disputes

Article

27 January, 2015

The Dispute Resolution Team at Forbes has seen an increase in the number of cases where relationships between company directors have taken a turn for the worse.

Let us imagine that three friends decide to start a business together, full of enthusiasm and optimism they cannot foresee any circumstances where they might fall out. In order to save costs they don't bother with an agreement between the shareholders and they buy an off the shelf company, making no amendments to the articles. On tax advice they take part of their remuneration as salary, and part as dividend with a monthly on account payment.

Things go well and the company turns a decent profit. Then relationships start to sour. There might be differences about the direction the company should go in, whether one is pulling their weight, or up to the job.

One storms out and refuses to return. What can the others do?

There are a number of issues to resolve. Can the absent director remain in post? If not, how can they be removed as a director?

It might not simply be a matter of following the company law procedures for removal of a director. If the company is classed as a 'quasi partnership' then the absent director could argue that the company, as it was originally set up, was subject to an agreement that they participate in its management. They might therefore bring a petition under Section 994 of the Companies Act that the affairs of the company are being carried on in a way 'unfairly prejudicial' to their interests.

What about remuneration?
The remaining director shareholders might have been quite happy for there to be substantial dividends paid when all three were working, but the remaining two may be less content to pay the third for no effort, especially when they may have to hire someone to replace them. However again the leaving director/ shareholder might see it as prejudicial to him to have the expected income from his shares reduced by the other two, and again this might give rise to an 'unfair prejudice' petition.

What if the leaving shareholder offers to sell his shares, but the remaining shareholders either think it is overvalued or they or the company cannot afford the price? There are a number of different solutions we can offer.

These will involve some negotiation, with a view to producing a result everyone can live with. This might involve a shareholders agreement being drawn up, or different classes of shares being created. There might be an agreement for the leaver to sell their shares, with stage payments or the price being left outstanding until the company is sold. Clearly there are lots of aspects to this, and negotiations may be drawn out.

The central message is wherever possible get agreements in place before implementing any business venture, but if it does all go horribly wrong there may still be a way through. Forbes' Dispute Resolution Team are here to help defend your position should litigation ensue, and to help negotiate and implement a solution.

Robin Stephens is a Partner and Head of the Dispute Resolution Department and can be contacted on 01254 222366 or email Robin Stephens

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