Navigating Shareholder Disputes

Navigating shareholder disputes in England requires a nuanced understanding of Company Law, along with corporate governance principles, and dispute resolution mechanisms. Shareholder disputes can arise due to a variety of reasons, including disagreements over company strategy, management decisions, profit distribution, or breaches of fiduciary duties. Sometimes the parties have simply moved apart, rather like a marital breakdown, and need to separate. 

Most companies, and the type of companies we at BBS are very experienced in dealing with, are relatively small, and are effectively partnerships in the sense of them being an incorporated version of a partnership between a few individuals or family members. They are often referred to a quasi-partnership. As such there a limited number of individuals who can or would want to buy the shares and become “married” to the others in the company. It is very different to a PLC type or other stock- market quoted company where you can easily sell on your shares if you no longer wish to be involved.   

In England & Wales, shareholder disputes are primarily governed by company law, which sets out the rights and obligations of shareholders, directors, and the company itself. The Companies Act 2006 is the primary legislation regulating companies in England and Wales. It provides provisions related to shareholder rights, director duties, and dispute resolution mechanisms. However, in many respects these are default provisions which will apply if the parties have not, upon setting up their company, or at a later date, but before the falling out, entered into a comprehensive properly drafted Shareholders Agreement. All shareholders are recommended to consider entering into such an agreement, rather than relying on the default provisions in statute or Table A articles, for example. BBS Law’s shareholder dispute solicitors can advise further on drafting these Shareholder Agreements. 

When a dispute arises, reference can be made to the terms previously agreed between the parties as to how they will resolve those issues. This may involve agreeing mediation or arbitration and can also address the means by which separation will occur, including how to value the shares, how they might be sold and other financial consequences of the parties’ “divorce”.   In the absence of a shareholder Agreement, statute provides some guidance as to how to proceed.  

Where there is a “fall- out” and absent a quick agreement (at least in principle as to who will buy out the other and at what price) the parties will look toward the court to exercise its jurisdiction to force a resolution, often that one side buys out the other, and insists upon independent valuations. This can be technical, and parties often wish to use the process to air all their dirty linen in public to blame the other for all the misfortune and to argue the company has been devalued by the other’s conduct. Some of this can be “hot air” (but expensive to argue out) or may have a material effect. The argument tends to be formulated that one side has acted in a manner unfairly prejudicial to the other. This triggers the court’s jurisdiction. A Skilled commercial litigator, familiar with these issues, can help to guide a client in the correct way.  

Elements of the proper advice which can be given, and should be given include, early communication and offers to mediate. Open dialogue between shareholders (or via their legal advisers) can often resolve disputes before they escalate. Mediation, facilitated by a neutral third party, can help parties find common ground and reach a mutually acceptable solution. Again, a good commercial litigator can guide a client through the mediation process. 

If formal litigation is needed, it is important to ensure all material documents, including financial records /bank statement and email etc is made available.  A party believing they are headed towards a dispute should seek early advice so these types of documents can be considered and preserved. Significant costs can be incurred at court arguing about access to documents and can be avoided or limited with sensible and prudent moves at the outset. 

Ultimately, whilst the court has power to order one side to buy out the other, it also has the power to wind up a company if it considers it just and equitable, as there is no future in it and one side or the other is not in a position to buy out the other, it will usually look to see if the business could be sold as a going concern. This can often involve detailed involvement of accountants and valuers as well as business selling agents. Coordination and cooperation between the various professionals are essential and an experienced commercial litigator will have access to reputable individuals who can assist and ensure as smooth a process as possible.  

If the court does find there has been unacceptable conduct or actions which were effectively improper as between the parties, it can reflect this in adjusting the price to be paid for shares etc, so keeping an eye on the financial consequences of issues in dispute is as important as the facts of the grievances themselves.  

It goes without saying that formal litigation should be a last resort, but if it is necessary, by involving the lawyers early, and having them try to resolve “outside court” given their knowledge of the alternatives in the event of no settlement, does ensure the process is handled commercially and sensitively.

Navigating shareholder disputes in England requires a strategic approach that balances legal considerations, commercial realities, and the interests of all shareholders involved. By understanding the legal framework, exploring alternative dispute resolution mechanisms, and engaging in constructive dialogue, shareholders can effectively manage disputes and safeguard their rights within the corporate structure. Ultimately, the goal is to achieve fair and equitable outcomes that preserve the integrity and viability of the company while minimizing the impact of conflict on its shareholders.

If you do find yourself in this position, please contact one of our commercial litigation solicitors in Manchester, who will be happy to assist.