Partnership & Shareholder Disputes
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We can advise on your rights, and in appropriate cases advise on an application to Court under The Companies Act 2006 for an order by the court on the ground that the company’s affairs are being, or have been conducted in a manner which is, unfairly prejudicial to the interests of its shareholders.
If a dispute arises between shareholders, the first port of call is usually to consider the Company’s Articles of Association.
Precisely what behaviour is “unfairly prejudicial” depends on the circumstances of each case, but in very general terms it may mean that minority shareholders can apply to the court if the majority shareholders run the Company in a manner that damages the minority shareholder’s position, (which usually means the worth of their shareholding), for instance by misusing company assets.
Disputes between partners can quickly become personal. We will advise you on how to avoid the financial costs that can arise and how to effectively resolve your dispute. Sometimes dissolution of the partnership is the only option, or to claim damages, and if so we will act for you decisively and swiftly. We will go through all of the options and ensure you receive practical advice.
We will listen to you and move forward with a sensitive strategy to reach a conclusion as quickly and cost effectively as possible.
How do you resolve a shareholder dispute?
To resolve a shareholder dispute, there are a number of options available. Some are listed below:
Shareholder agreement.
If you have a shareholder agreement, the first thing to do is to review this as it will often include a way to resolve any disputes that arise.
Negotiation.
Discussions between you both to try and come to an agreement. This could be a sit-down conversation, or it can be done via email, letter or by your solicitor on your behalf.
Mediation.
Is a formal process, with a structure where an independent third party (‘Mediator’) helps to resolve disputes. It usually consists of talking through the problems to try and find a solution that works for all those involved.
Bringing a claim to the court as a shareholder (or minority shareholder)- Unfair Prejudice proceedings. This is a process, where a minority shareholder can bring an application to the court to help them resolve an issue they have with the other shareholders or directors about how the company is being run.
The basic requirements to bring an application are:
- The claimant must be complaining about something that did or did not happen within the company.
- The conduct must have caused harm (or prejudice) to the interests of the claimant as a shareholder.
- The prejudice must be unfair.
The court has a variety of remedies they may order. The most common is the majority shareholder is ordered to purchase the minority shareholder’s shares at a value determined by the court. This is usually only appropriate if the company is making profit, and the shares have substantial value.
Bringing a claim to the court on behalf of the company- Derivative proceedings.
A company is a separate legal person- distinct from the directors and shareholders. However, if the wrongdoers are the people in control of the company, they may not act in the company’s best interests and will not bring a claim against themselves. That is where a derivative claim comes in…
This allows an interested party (minority shareholder for example) to bring a claim on behalf of the company.
Splitting the business.
Depending on the nature of the dispute, it may be appropriate to split the business between the shareholders in dispute.
For example, you may see the future of the business going in different directions, so you may wish to carry that vision forward on your own.
Close the company down (dissolve the company).
If no solution can be found, then dissolving the company may be an option. Even if the company has assets and money the company can still be dissolved, this is called a Members’ Voluntary Liquidation. The company will be brought to an end and any surplus funds will be split between the shareholders.
What action can shareholders take against directors?
It will depend on the extent of the disagreement between the shareholder and the director. It will also depend on whether it is simply a disagreement or if the director is in breach of any agreement with the member(s) or acting outside of the rulebook for the company (also known as the ‘articles of association’).
If a shareholder simply disagrees with the director(s) they could consider if they want or are able to sell their shares. Although, this may be restricted by the articles of association.
If a shareholder believes the affairs of the company are being conducted in a manner which is causing harm to that shareholder’s interest, then they can bring a claim to the court to ask for a resolution or remedy, known as an unfair prejudicial claim for relief. The court may order for the other shareholders to buy out the shareholder who brought the petition.
If the shareholder holds 5% or more of the voting rights, the member can request a general meeting or circulate a written resolution. The shareholder will need support from others in order to pass any resolution, unless that shareholder has enough votes to pass the resolution themselves.
The resolutions could include:
- The removal of one or more company directors (requires special notice and must be passed at a general meeting)
- Seek appointment of additional director(s)
- Direct the directors to take specific action.
How can you resolve a Partnership dispute?
There are two categories of partnership disputes: those with an agreement and those without.
With an agreement:
Usually, the partnership agreement will have provisions that say how a dispute should be dealt with.
Where a dispute arises, it is usual for a provision of the agreement to specify alternative dispute resolution methods which should be used, they may include arbitration (when a neutral third party makes a decision) or mediation (where a neutral third party assists both sides to come to a solution) for example.
Where there is an agreement, disputes tend to avoid court. However, there are times when disputes need to be resolved with court action. For example, enforcing a restriction or the partnership agreement needs interpreting.
If you find yourself in a dispute with your partner(s) and are not sure what the agreement lets you do, we recommend you seek legal advice to prevent incorrect interpretation. Or, if the agreement has been ongoing for some time and you are unable to resolve it between the partner(s) we recommend legal advice as this is a way of getting an independent view on the situation and should reduce the chances of future litigation.
Without a written agreement (Partnership at Will).
If there is no formal written agreement between the partners, then the terms that apply to the partnership are implied by the Partnership Act 1890.
The Partnership Act does not imply any dispute resolution procedures, and this leaves the business at risk of long and costly court proceedings to resolve any disputes that may arise.
In this circumstance, it is even more important to seek legal advice, especially if there are signs of conflict between the partners. Addressing any issues early should reduce the chances of lengthy and costly court proceedings.
Litigation vs Alternative dispute resolution (ADR).
ADR should always be considered before jumping straight into court proceedings. This is because court proceedings are lengthy (can take months or even years to get a resolution), they are more expensive, and the losing party is also likely to be ordered to pay the winning party’s costs.
Court proceedings are public, this can be damaging to your business’ reputation.
Overall, litigation can be costly and can require a lot of your time so ADR should always be considered and, if appropriate, tried before proceeding with court proceedings.
There are various kinds of ADR but the most common formal kind is mediation. The idea is that settlement discussions take place between the partners, and they come to a suitable resolution for them. This means the full costs of litigation are avoided and a resolution is found much quicker than going through court. Also, the discussions will be private and won’t damage the business reputation or take up as much of the partners’ time, as court proceedings.
Other forms of ADR can be considered, if mediation is not appropriate.
