Dispute resolution
Shareholder & Boardroom Disputes
Shareholder & boardroom disputes resolutions for start-ups, scale-ups and the entrepreneurially spirited
It is crucial, in the event of disputes amongst shareholders, for these to be resolved quickly and effectively. There can also be wide ranging ancillary issues, such as the removal of directors and the termination of employment contracts which need to be dealt with.
Our experts have acted for majority and minority shareholders, combining in-depth knowledge of the legal position with the commercial awareness which comes from our extensive experience in this area. We know how to use the right strategy to protect your interests and resolve matters quickly and effectively.
We have considerable experience in the early resolution of these disagreements and disputes can often be settled by negotiation, which is the ideal, however, where further action is required, we have specialists ready to commence court proceedings.
Experience in shareholder disputes
We have experience in a wide range of shareholder dispute matters including the following:
- Advising in respect of shareholder disputes and multiple founder disagreements dealing with the exit of shareholders, including those with employee and director status
- Assisting with exit strategies, including those involving intellectual property issues
- Advising in respect of restrictive covenant breaches concerning exiting founders
- Acting for former director and shareholder in defending claim for breach of fiduciary and director duties
- Acting for former director in defending claim by company in liquidation for breach of fiduciary duties, transactions at an undervalue and unlawful preferences
Legal Considerations
Contractual Documents
Review the articles of association and any relevant shareholders or founders agreements.
Directors Duties
The common law and equitable duties of directors (and shadow and de facto directors) are codified in section 170 of the Companies Act 2006. These duties include:
- To promote the success of the company for the benefit of the members as a whole (s.172);
- To exercise independent judgment (s.173);
- To exercise reasonable care, skill and diligence (s.174);
- To avoid conflicts of interest (s.175);
- Not to accept benefits from third parties (s.176); and
- To declare any interest in a proposed transaction (s.177).
Minority Protections
“Unfair prejudice” is a legal action that exists pursuant to s.994 of the Companies Act 2006 to offer statutory protection for oppressed minority shareholders. When a shareholder feels that a company’s board of directors is acting in a way that prejudices him/her as a shareholder or a group of shareholders, that shareholder (or the affected group of shareholders) may have a right to bring an action for “unfair prejudice”.
In order to bring such a claim, a shareholder must show that:
- The conduct of the board caused prejudice or harm to the “relevant interest” of the shareholders or some of the shareholders of the company; and
- Such conduct was “unfair”.
The following is a non-exhaustive list of what the Courts have previously considered to amount to unfair prejudice:
- Breaches of directors’ fiduciary duties.
- Breaches of companies’ articles of association.
- Excluding shareholders from the management of quasi-partnerships.
- Diverting business to other companies in which the majority shareholder (but not the minority shareholders) holds an interest.
- Deliberately diluting a minority shareholding for no good reason.
- Causing a decrease in the economic value of the shares or placing the economic value of shares in jeopardy as a result of misconduct by the board of directors.
The Court has a wide discretion when it comes to relief and can order that the company’s affairs are judicially regulated in future or that the company refrain from acting in a certain way. Most frequently the remedy granted is to provide for the purchase of the shareholding of the unfairly treated member by the other shareholders or by the Company itself and, in the case of the purchase by the Company itself, the reduction of the Company’s capital accordingly. The applicable valuation is often the price that would have been achieved as if the unfairly prejudicial treatment had not taken place.
Just & Equitable Winding Up
Under s.122(1)(g) of the Insolvency Act 1986 (“IA 1986”) a company may be wound up by the Court if ‘the court is of the opinion that it is just and equitable the company should be wound up’. The grounds of what may constitute ‘just and equitable’ are not exhaustively defined but can include:
- A deadlock that prevents decisions being made concerning the running of the company;
- Being wrongly excluded from management;
- Majority shareholders consistently ignoring the interests of the minority; and
- Mismanagement.
It should be noted that even if the criteria for bringing a claim for a just and equitable winding up can be met, the Court may still refuse to grant the relief on the basis that there is an alternative remedy available. Since this is both a discretionary remedy and drastic in nature, the Court may deem that it is unreasonable for the petitioner not to pursue an alternative remedy where a realistic one exists (s.125 IA 1986).
Derivative Actions
In order to offer further protection to a company, a claim can be brought by shareholders on behalf of the Company to redress a wrong. This can be utilised in many scenarios but it should be noted that it is not a straightforward claim to bring and legal advice should be obtained.
Find out how we can help with shareholder disputes & boardroom fall-outs.
Other factors to Consider
Company buyback of shares and subsequent cancellation. This can be a useful route provided 75% of the shareholders will consent as the Company meets the acquisition cost; however it must have sufficient surplus cash.
If a founder is looking to step aside then perhaps a reorganisation can assist with the variation of rights but retention of financial reward.
An anti-embarrassment clause can operate effectively in any settlement agreement, with the sale price for shares being uplifted if an event such as a sale of the business occurs or funding is received subsequent to exit.
A key to the resolution of a dispute is often an independent valuation of the relevant shareholding. To secure this the parties will need to determine the basis of the valuation.
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Other factors to Consider
Company buyback of shares and subsequent cancellation. This can be a useful route provided 75% of the shareholders will consent as the Company meets the acquisition cost; however it must have sufficient surplus cash.
If a founder is looking to step aside then perhaps a reorganisation can assist with the variation of rights but retention of financial reward.
An anti-embarrassment clause can operate effectively in any settlement agreement, with the sale price for shares being uplifted if an event such as a sale of the business occurs or funding is received subsequent to exit.
A key to the resolution of a dispute is often an independent valuation of the relevant shareholding. To secure this the parties will need to determine the basis of the valuation.
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