Shareholders’ disputes and how to be prepared for them

SHAREHOLDERS’ DISPUTES AND HOW TO BE PREPARED FOR THEM

There are many circumstances which can cause disputes to arise between shareholders or directors. These include disagreements over the direction of the company, conflicts of interest, personality clashes and power struggles, the terms of directors’ service contracts or because a shareholder or director isn’t fulfilling their obligations.

Dealing with shareholder disputes can be difficult and costly. It is therefore prudent to have measures in place to try and avoid a dispute happening in the first place, or at least stop an existing dispute from escalating.

Many companies are governed by the model articles of association. Directors and shareholders of such companies should familiarise themselves with these terms and understand what happens in the event of a disagreement between members of the board.

Model articles do not, however, address what happens if there is a dispute at shareholder level. The best way to prepare for this scenario is by entering into a shareholder agreement.

It is advisable to draw up a shareholder agreement as part of the process of setting up a company, particularly where the company is private and has a small number of shareholders. This allows shareholders to raise issues which could become problems in the future and make sure that the agreement adequately sets out how those issues should be dealt with. A shareholder agreement makes clear what everyone’s rights and obligations are from the outset.

A shareholder agreement should include:

• A provision that certain decisions should be cleared by minority shareholders before being passed. This has the benefit of making minority shareholders feel like their opinions have value.
• A dispute resolution clause which sets out what happens in the event of a deadlock and is particularly useful when all shareholders hold an equal number of shares.

Shareholder agreements are confidential; they are not public documents and do not generally need to be filed at Companies House.

Shareholder disputes which cannot be easily resolved could lead to litigation or mediation. These are time-consuming processes which can be expensive. Moreover, being embroiled in a dispute takes away from the day-to-day running of a business and could delay the pursuit of objectives which will advance the company.

With the right planning and a well-drafted shareholder agreement, it may be possible to stop disputes from happening in the first place. Should a dispute be unavoidable, the agreement can set out measures to stop any disagreement from escalating to the point that it becomes detrimental to the running of the company.

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