Orr Litchfield

Solicitors and Business Lawyers

Shareholder Disputes

1. Shareholders statutory, common law and contractual rights and obligations

Differences of opinion among shareholders are commonplace. They can arise for a variety of commercial reasons, such as, opposing views as to financial, legal, operational or sales issues or strategies or simply due to the different personalities involved. However, if they are not resolved in a practical, efficient and effective way, they can develop into disputes which may be highly damaging for a company, its shareholders, management and staff.

Shareholders have numerous statutory, common law and (usually) contractual rights and obligations. In most cases, the main sources for identifying shareholder rights and obligations will be the Companies Act 2006, the Memorandum and Articles of Association of the Company (particularly the latter) and any shareholders’ agreement which some or all of the shareholders have entered into.

Typically, shareholders' rights vary depending on the percentage of shares/voting rights they hold in the company. In the case of, Minority shareholders' rights, the following percentage of shares may be important:

(a) At least 5%: right to apply to court to prevent the conversion of a public company into a private company; to call a general meeting; to require the circulation of a written resolution to shareholders (in private companies); and to  require the passing of a resolution at an annual general meeting (AGM) of a public company.

(b) At least 10%: right to call for a poll vote on a resolution.

(c) More than 10%: right to prevent a meeting being held on short notice (in private companies).

(d) 15%: right to apply to the court to cancel a variation of class rights, provided such shareholders did not consent to, or vote in favour of, the variation.

(e) More than 25%: right to prevent the passing of a special resolution.

It is important for shareholders to consider appropriate alterations to the Memorandum and Articles of Association of the Company and the need for a shareholders’ agreement in order to assist with the proper running, development and management of the company.  

You can read more information about each of the Memorandum of Association, Articles of Association and shareholders’ agreements from our Corporate Law section.

Most companies will come across shareholder issues and disputes at some point. When they arise, it is usually important to be able to manage and resolve the relevant issues as efficiently and effectively as possible in order to minimise disruption, save time and costs and avoid causing any damage to the reputation of the business. Where circumstances permit, the pro-active management of such issues and disputes may enable the parties to maintain or even strengthen their business relationship for the overall benefit of the Company.

2. Advising and assisting you on shareholder disputes

Whether you are a claimant or a defendant in relation to a shareholder dispute, we are able to provide efficient and effective legal advice and support in relation to your dispute using our legal knowledge, experience and commercially focussed approach to resolve the dispute in a way that is right for you.

3. Resolving shareholder disputes

There are several key stages in assessing and resolving shareholder issues and disputes. These include:

(a) Step 1 - Identifying the relevant statutory, common law and contractual rights and obligations of the shareholders.

At the outset, it is vital to identify the relevant statutory, common law and contractual obligations of the shareholders. This is not always a simple task.

The main sources for identifying shareholder rights and obligations are likely to be the Companies Act 2006, the Memorandum and Articles of Association of the Company (particularly the latter) and any shareholders’ agreement.  Shareholders should have a written shareholders’ agreement (to which the Company may be a party). However, such agreements may not have been prepared or maintained adequately or may have been supplemented over time by other contractual arrangements (for example, deeds of adherence).

We can advise as to the relevant statutory, common law and contractual obligations of the shareholders.

(b) Step 2 - Determining whether shareholders have breached their obligations and what remedies may be available

Once the relevant statutory, common law and contractual obligations of the shareholders whose actions are in question have been identified, it is necessary to determine whether a breach has occurred and, if so, what remedies may be available.

Where a breach is of a contractual nature, the contractual terms may include provisions relating to the rectification of contractual failures, the resolution of contractual disputes and the grounds on which parties may terminate the contract. The nature and extent of any breach of contract is often important.

Where a shareholder is found to be in breach of his or her obligations, the other shareholders or, in some cases, the Company may be able to seek remedies such as an injunction, the restitution of profits, the return of property, the rescission of a contract and/or damages against a recalcitrant shareholder.

Where appropriate, a shareholder may be able to:

(i) Petition for relief under the Companies Act 2006 where (a) the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members, in their capacity as such (including at least himself), or (b) an actual or proposed act or omission of the company is or would be so prejudicial;

(ii) Bring derivative actions in the name of the company;

(iii) Petition for the winding up of a company on the grounds that to do so is just and equitable under the Insolvency Act 1986; or

(iv) Exercise various other rights under the Insolvency Act 1986 and the Companies Act 2006.

We can advise as to whether a breach has occurred and, if so, what remedies may be available and consequently help determine whether it is likely to be in your interest or the interests of your business to pursue the breach.

(c) Step 3 - Seeking an early resolution for shareholder disputes

Normally, it is in the interests of the parties to identify and resolve any shareholder issues and disputes efficiently and effectively so that they can continue to progress the arrangements in an acceptable manner.

The Articles of Association, a shareholders agreement or other documents may include provisions relating to the resolution of certain issues and disputes relating to shareholders. Where this is not the case, it is often sensible to try to take steps to resolve any issues or disputes. By way of example, the parties may agree to try to achieve resolution through direct discussions or some form of alternative dispute resolution.

(d) Step 4 - Letter before action

Where it has not been possible to resolve any shareholder issue or dispute, it may be that it is necessary to formally notify the other party (or parties) that legal action will be taken unless the relevant issue or dispute is resolved satisfactorily. This notification is usually sent in the form of a ‘letter before action’. It will, amongst other matters, set out the complaining party’s legal position, the outcome the complaining party wishes to achieve and the steps it proposes to take if a suitable agreement is not concluded.

We can prepare appropriate and effective letters before action and advise you on subsequent communications with a view to helping resolve any issues and disputes relating to shareholders.

(e) Step 5 - Alternatives to litigation for shareholder disputes

It has become more and more common for parties which are in dispute to use alternative methods of resolving disputes prior to issuing legal proceedings or during the litigation process (typically at an early stage). The 4 main alternative methods of resolving disputes (commonly called ‘Alternative Dispute Resolution’ or ‘ADR’) in the UK other than court proceedings are negotiation, mediation, arbitration and conciliation.

Whilst ADR is not suitable for every dispute, courts often expect disputing parties to take steps to resolve disputes prior to commencing legal proceedings or at an early stage of the litigation process. An unreasonable refusal to do so may result in the court imposing sanctions (typically in the form of costs penalties) on the relevant party.

We can advise on the relevant form of ADR and assist you in relation to the ADR process with a view to helping resolve any shareholder disputes

(f) Step 6 - Court proceedings for shareholder disputes

If it has not been possible to resolve a dispute, it may be that the only way forward is to commence formal legal proceedings. Where that is the case, we can help prepare your claim and provide clear advice on legal, procedural and tactical issues in order to assist you through the litigation process efficiently and effectively.

Contact us

If you would like more information about shareholder disputes or would like to discuss a potential or existing dispute, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.