A successful business fundamentally depends on teamwork. Workers, managers and owners operate together in various teams, arrangements and hierarchies, each with distinct rights and responsibilities. However, if these relationships break down, the consequences can be severe. Understanding how to navigate shareholder disputes is essential for anyone involved in company ownership, from family businesses to multinational enterprises.
The nature of share ownership
The relationship between shareholders and company management is often misunderstood. Consider this simple example: a parent lends savings to an adult child as seed capital to start a courier service, perhaps for the purchase of the all-important van. The son or daughter is trusted to get on with the work and eventually repay the loan. At the other end of the scale, your pension may buy shares in a multinational corporation, giving you nothing more than a tiny percentage holding with no personal connection or control.
Whatever the size of the investment, buying shares or providing capital does not in itself entitle the shareholder to supervise the company’s day-to-day operations. Directors have the legal right to manage, invest and negotiate on behalf of the company. They do, however, have an innate responsibility to take care of all assets, including share capital. This separation between ownership and management is fundamental to company law, but it can also be a source of significant friction.
When things go wrong
The Companies Act 2006 and company law provide remedies and rules for shareholders who feel management is irresponsible, but these tend to be clumsy, complex mechanisms when things go wrong. Without a majority of shares or the support of enough other shareholders, a troubled investor may have little leverage with which to force a company vote or change of course. The minority shareholder can find themselves in a particularly vulnerable position, unable to influence decisions they believe are damaging to their investment.
All companies are constituted by a Memorandum and Articles of Association, and these ought to be checked by any incoming finance provider to see what the limits of shareholder power are. Even if you do not anticipate problems, it is always better to know in advance what you can do if there is an unforeseen dispute. These constitutional documents set the ground rules for how the company operates and what rights shareholders possess.
Prevention through proper planning
As always, prevention is better than the cure. Where shares are acquired in a small or medium-sized company, the potential shareholder can seek a formal shareholder agreement. This is a contract which sets out the relationship between shareholders and directors; shareholders and other shareholders; and shareholders and third parties. This document should be detailed and comprehensive, narrating a reliable procedure for resolving disputes before they escalate.
Such disputes may concern money spent, hiring of staff, acquisition of business premises or decisions on dividends. They could also involve more fundamental questions about the company’s strategic direction. A well-drafted shareholder agreement anticipates these potential flashpoints and establishes clear processes for addressing them.
Protecting share value
In addition to operational disputes, the agreement will provide a mechanism to support the value of the shares held by each investor, ensuring they cannot be artificially depressed. Equally important, it ensures that an argumentative shareholder cannot be ousted without suitable financial compensation. These provisions protect both majority and minority shareholders from opportunistic behaviour.
Without shareholders being allowed to interfere unnecessarily in the daily administration of the company, a formal agreement will provide for shareholders being entitled to financial reporting and a suitable level of consultation on major company decisions. This balance is crucial: shareholders need information and influence over significant matters without micromanaging operational details.
Formal dispute resolution mechanisms
When informal resolution fails, more formal mechanisms become necessary. Shareholders can call a meeting of the company – it might be an Extraordinary General Meeting, unless the shareholder prefers to wait for the Annual General Meeting. There are procedures for adding a motion to the upcoming meeting agenda to allow the point to be discussed and voted upon. These meetings provide a forum for airing grievances, as well as seeking collective solutions.
Company law is quite specific in its processes and remedies. The company itself is a separate legal entity from its investors and directors, and all of them serve its best interests. The procedures to take a problem forward are strict and must be followed carefully to ensure any action taken is legally sound.
The importance of communication
All disputes are best solved by direct and informal conversation or correspondence. By opening channels of communication early, before positions become entrenched, businesses can prevent minor disagreements from becoming major conflicts. Many shareholder disputes arise from misunderstandings or a lack of information rather than genuine conflicts of interest.
For investors in companies of any size, the message is clear: understand your rights before you invest, secure proper agreements that protect your position, and maintain open lines of communication with fellow shareholders and directors. When disputes do arise, act promptly and follow proper procedures. With careful planning and professional advice, most shareholder disputes can be resolved without resorting to costly and time-consuming litigation.
John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for almost 20 years, with experience in all areas of business law.
