Reasons for Shareholder Disputes

Shareholder disagreements can occur for various reasons, causing both operational and financial issues that can undermine the business and even cause reputational damage. These disputes risk becoming time-consuming with potentially costly litigation. These issues are particularly acute for small and medium-sized private companies (SMEs), under which shareholders often fulfil simultaneous roles of directors or employees and conflicts of interest are more prevalent. Shareholder disputes operate in a complex and technical area of the law, and as such their resolution often requires a highly sensitive and creative approach.

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Directors, oversee the day-to-day control of a company, a position that gives these individuals the right to make certain decisions on the company’s behalf, for example, entry into contracts or the raising of finance. Usually, they act as a majority subject to the articles of association of that company.

Shareholders, take ultimate control and they have the power to dismiss directors and appoint new ones. It is important to note in these instances, however, the difference between minority and majority shareholders. Majority shareholders own 50% or more of the shares in a company, with the reverse pertaining to minority shareholders. Inevitably, majority shareholders take stronger positions and rights in these disputes, which is why boardroom disputes can take two forms: a majority shareholder being blocked by the minority, or a minority shareholder being overtaken by a majority.

Common causes of shareholder disputes

There are numerous reasons why a shareholder dispute can arise and the main ones are discussed here.

Disagreement over the management of the company 

Management disputes commonly revolve around company finances. Where shareholders also take roles as employees or directors, disputes can often arise regarding the amount of money taken out in the form of dividends or salary payments, and that which is reinvested for company development. For companies struggling financially, handling these arrangements can be particularly divisive, especially where there is disagreement surrounding the sensitive issue of winding up a company (and cutting losses) versus embarking on strategies to remedy this.

Other management disputes can evolve where parties feel they are being excluded from the management, or that they are operating on a board where there is constant deadlock and, therefore, a lack of progression. Sometimes these disputes leave certain shareholders feeling that company is being run for the benefit, or in the interests of, a single or distinct number of the shareholders.

Shareholders lack of participation 

SMEs often have shareholders occupying roles as directors or employees. This can incite disputes where it is felt that a shareholder is not performing adequately in these latter roles. Such issues can become particularly protracted where most of the money taken out from a company is in dividends rather than salaries. In such scenarios, shareholders who put in significantly more time and effort within their capacity as employees or directors may feel undermined by those entitled to reap the same rewards albeit with much less work.

Personal issues arising between shareholders 

Trust forms an incredibly important part of starting, and indeed running, a business. This is why many businesses originate between former colleagues, friends and family. These interpersonal relationships, though successful in forming businesses, can often constitute an acute source of problems where they deteriorate.

A prime example is where spouses who run businesses together begin divorce proceedings. Unfortunately, it is not uncommon for acrimonious divorce proceedings to spill over into the management and ownership of a company. These disputes tend to regard ownership of the company and valuation of its shares, sometimes resulting in the removal of one spouse as a director (or their dismissal as an employee). These very issues are being considered in the Bill and Melinda Gates divorce in relation to the future of the Gates Foundation, where they are currently co-chairs and trustees.

Valuation of the company shares 

Where shares are sold in a private company, it can be difficult to find an unconnected purchaser. As such, shares are often trading amongst existing shareholders, which can make for a tricky process in determining a fair value. This is particularly the case when a major part of the value of the company arises from the work done by (or association with) its shareholders. 

Resolving a shareholder dispute

There are various routes that can be considered, including non-litigious avenues such as mediation, arbitration as well as litigation. Preventing disputes by ensuring all documentation and contracts relating to the company are carefully drafted is always recommended.

All shareholders possess statutory rights and are entitled to bring claims and exercise remedies on the basis of these rights. Sometimes, these rights can be used to the advantage of defusing a dispute. The rights of shareholders include the right to:

• Inspect company registers
• Receive notice of general meetings and attend them
• Require company to call general meetings
• Enforce rights conferred by the articles of association
• Object to an improper alteration of the articles of association

Unfair prejudice is a mechanism that can be used by aggrieved minority shareholders as a form of dispute resolution. An individual in these circumstances can petition to the court where they believe the business is being conducted in a manner unfair and prejudicial to their interests as a shareholder. These kinds of behaviour include:

• Misappropriation of company assets and/or funds
• Exceeding of powers
• Poor management