Shareholder Dispute Resolution – Lexology
“Resolving shareholder disputes”
We’ve discussed board dispute resolution here: https://brodies.com/insights/corporate/a-handy-guide-to-reresolution-board-disputes/
More fundamental shareholder disputes can often arise for a wide range of reasons, including a few examples: shareholders feel that the company’s affairs are mismanaged, disagreements over how the company is run, or even embezzlement of company funds.
Ideally, any dispute between shareholders should be dealt with at general meetings. However, when concerns are not properly addressed at these meetings, other avenues may need to be explored. To identify the options available to shareholders, the parties should check (i) the company’s articles of association and (ii) the shareholders’ agreement (if applicable). Beyond this, shareholders should consult the Companies Act 2006 (the “Act”) which provides guidance on how shareholders can resolve disputes.
Shareholders have certain statutory rights under the Act which may be helpful in resolving disputes. For example, shareholders have the right to require the company to call a general meeting. Sometimes these rights may be sufficient to rectify the disagreement. This is particularly the case if the articles of association and any shareholders’ agreement contain an adequate provision for voting, intervention by the chairman or dispute resolution. However, in some circumstances it may be necessary to explore other options.
Article 994 – the legal recourse:
As a result of the dispute, shareholders (especially minority shareholders) may feel unfairly aggrieved and excluded from business and corporate decision-making. Fortunately, the law provides means of protection in these circumstances. Section 994 of the Act acts as a legal remedy for shareholders who suffer unjust prejudice. Under Section 994 of the Act, a shareholder may take legal action when the affairs of a corporation are conducted in a manner unfairly prejudicial to some or all of its members and their interests. There is no simple definition of what constitutes “unjust hardship” and the court has wide discretion in applying them. A key consideration to note, however, is that the court applies equal weight to both parts of the wording. Thus, no matter how prejudicial an action is, if it is not deemed unfair in the circumstances, no right of recourse will be available to the aggrieved shareholder.
Some situations where courts have found unfair hardship include:
- Misappropriation of business or company assets;
- Mismanagement of company affairs; and
- Non-payment of dividends or payment of excessive dividends.
Article 996 – legal remedies:
Section 996 of the Act gives the court sweeping powers to grant remedies to shareholders whose interests have been unjustly harmed. If the court is satisfied that the motion brought by the shareholders is “well-founded”, it has the power to make any order it deems sufficient to remedy the unjust prejudice suffered. The purchase of the shares by the offender (usually a majority shareholder) or by the company itself (share buyback) is the remedy most often requested and granted. Some of the court’s other remedies may include:
- Regulate the conduct of the company and the management of its affairs in the future;
- Require the company to refrain from continuing to act in an unjustly harmful manner or on the contrary, if by omission the company has not acted, it must act;
- Authorize civil suits to be brought on behalf of the company;
- Prohibit the company from amending its articles of association without the consent of the court; Where
- In extreme circumstances, the fair and equitable liquidation of the company.
Avoid conflicts between shareholders
Initiating an unjust prejudice case can be a long and costly process, and it is worth bearing in mind that potential shareholder disputes can be avoided by having a shareholders’ agreement in place. A shareholders’ agreement is a contract between all or part of the shareholders and (if applicable) the company itself. It may deal with some or all aspects of the relationship between the parties, including the personal rights and obligations of shareholders. It will reflect the intentions of the parties as to how the business will be managed and directed. A shareholders’ agreement can prevent or provide a way to resolve disputes that may arise. The implementation of a shareholders’ agreement is simple and relatively inexpensive compared to the cost of resolving a dispute in the absence of any agreement.