Resolving Boardroom Conflict – 5 More Tips
Disputes between shareholders of private companies are often emotional and can be as complicated as a personal divorce. The disruption to any business can be extremely damaging. Knowing what remedies are available to resolve matters quickly could be the key to survival.
- What if the majority is taking unfair advantage of you?
- What if you suspect co-shareholders are stealing from the company?
- In the second of a series, here are five further important pointers to be aware of:
1/ Protecting the Minority
There is a common misconception that the complex laws and regulations relating to companies should achieve a just and fair relationship between a minority shareholder and the majority. However, there is very little law which protects the minority, unless the parties have agreed beforehand.
Differences between shareholders don’t always arise because of power struggles or personal animosity. Frequently, disputes are down to differences in approach where one party wants to retire or withdraw their investment. Disagreements may centre on
- valuation issues
- the direction of the company
The public courts are unlikely to be the ideal venue for resolving shareholder disputes. Proceedings are in the public domain and the procedure can be expensive and slow.
Particularly where private companies are concerned, there are effective alternatives, including: negotiation, mediation and arbitration.
2/ Shareholder Agreement
An effective way to address potential problems before they arise is a Shareholder Agreement. This sets out ground rules for the shareholders in given circumstances. Many potential and predictable problems can be addressed in advance in a Shareholder Agreement. This leaves the shareholders to concentrate on managing the business, rather than a future internal dispute.
Amongst other things, the agreement can cover:
- management responsibilities
- non-competition restrictions
- bonus and remuneration formulae
- approval/decision process for major corporate decisions
- buy/sell provision – e.g. a “shotgun clause” to force a transaction
- how a shareholder can realise his or her investment in the company
- whether to impose any restrictions on selling shares
- criteria on valuing the shareholding
- exit provisions – timetable for sale
- appointment of an independent third party to value the shares
- a detailed dispute resolution framework
3/ What is an “Unfair Prejudice” claim?
The majority shareholders are in a powerful position, even where there is a Shareholder Agreement. However, the court will protect the position of minority shareholders from being abused in certain circumstances.
Section 994 of the Companies Act 2006 allows a shareholder to apply to the Court for an order declaring that the affairs of the company are being conducted in a manner unfairly prejudicial to the minority shareholder’s interests. If the court agrees, it will usually order that the shares of the minority shareholder are bought for fair value. However, the Court has a very wide discretion as to what it can order, including:
- purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s capital accordingly
- conduct of the company’s affairs in the future
- company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
- civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
- company not to make any, or any specified, alterations in its articles without the court’s permission
4/ When might a court find “unfair prejudice”?
Where a minority shareholder believes that the company is being run in a way which is unfairly prejudicial to some of the shareholders, the aggrieved shareholder can make an application to the Companies Court for a remedy. Unfairly prejudicial conduct may include for example:
- majority shareholders paying themselves excess remuneration
- majority shareholders failing to pay dividends
- breach of duty by diverting business to majority shareholders or their connected companies
- directors selling or buying assets at an unfair price
- failing to pay declared dividends
- undertaking activities which are not permitted under the company’s Articles
- doing something which might result in the company’s insolvency
- failure to follow company law or proper procedure on meetings.
- failure to issue annual accounts
In small to medium sized private companies, the court might be persuaded that a “quasi-partnership” exists. The aggrieved party may complain that there is a breach of their ‘legitimate expectations’ about what the company was set up to do, and how it would be run. E.g.
it was agreed, or a common intention is proved:
- the company would carry on a particular business
- all would be entitled to an equal say in how the company is managed
- a mutual expectation of continued employment
- the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out
If the court decides that a quasi-partnership exists, termination of that arrangement or unfair prejudice to the minority may result in the majority being obliged to buy out the shares of the aggrieved minority shareholder. If the majority acts in breach of such
the court may intervene.
Where an aggrieved shareholder has cause for complaint, urgent action is required. The court may refuse to interfere if a minority shareholder let the matter slide. The court will treat this as acceptance of the action taken by the majority:
“delay defeats equity”.
The court will consider all of the background circumstances on an application, including the minority shareholder’s own conduct.
These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision. Quite often, one or more of the shareholders leave with a package.
For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com