Company Shareholder Disputes | A Claimant’s Perspective
Shareholder disputes are a common occurrence, whether between shareholders themselves or between the shareholders and the Board of Directors. These conflicts can stem from a variety of issues, including breaches of directors' duties, disagreements over company policies, financial mismanagement, or disputes over financial remuneration.
At the start of any business venture involving multiple individuals with shared responsibilities, it is strongly recommended that the participants establish formal documentation outlining, in detail, their collective objectives, individual responsibilities, duties and financial obligations. This should be in the form of a professionally drafted Shareholders’ Agreement, which defines the parameters for the operation of the business.
This Shareholders’ Agreement should contain agreed resolution procedures to be followed in the event of dispute. It is designed to avoid the uncertainty, delay, cost and potential disruption to the business of formal court proceedings. Failure to do so, may result in a costly litigation.
Clearly, where no Shareholders’ Agreement or similar legal document has been prepared, any dispute is likely to be even more difficult to resolve. Shareholder and director disputes can have the ability to cripple the operation of a company, so seeking settlement in the least disruptive fashion is important.
Stuart Southall of KANGS outlines the Claimant’s perspective on the potential steps required, in the event that the ‘disputing’ Parties fail to resolve their differences and formal action becomes necessary.
Common Causes of Shareholder Disputes
Where more than one shareholder is involved in the running of a business, the potential causes for disputes are numerous.
Frequent causes for dispute are:
- disagreement relating to the direction and management of the company,
- one or more of the shareholders behaving in a manner likely to be detrimental to the company or other shareholders,
- disagreements over distributions of dividend payments and the distribution of profits,
- breakdown of personal relationships between the shareholders,
- breach of fiduciary duties where the Director and shareholders believe that directors or other officers are acting in their own interests to the detriment of the company,
- minority shareholders opposing actions of others claiming that they are being unfairly treated.
- financial problems.
Letter before Action | Letter of Claim
When Parties have reached the “irreconcilable point” and a dispute is likely, the first step to be taken is the preparation of a Letter before Action (LBA), which is also known as a Letter of Claim (LOC).
The LBA is the pre-curser to any formal proceedings being issued. There is an expectation, under the Civil Procedure Rules (CPR) that any disputing parties follow the applicable Pre-Action Protocols, unless there is a credible reason as to why the Protocol could not be followed, such as the need for an urgent interim injunction.
As such, a properly prepared LBA will provide the recipient with all the relevant information needed to enable them to understand the case they are expected to answer. The LBA will therefore contain:
- the historical relationship between the Parties;
- the reasons why the relationship has broken down between the Parties;
- the alleged breaches that have occurred;
- details of the losses;
- the options available to the recipient; and
- the time periods for responding and the consequences of not responding within that time.
Evidence in Support of the Claim
Under the Pre-Action Protocols, the "sender" is obliged to provide copies of all the documents that they intend to rely upon. This obligation ensures that the recipient of the LBA is afforded the opportunity to assess the "weight" of the evidence presented against them.
Similarly, when responding, the recipient is expected to disclose all documents they intend to rely upon. This reciprocal exchange of information enables the sender to understand the recipient’s position and why. It also allows the Parties to try and work out what elements of the dispute may be narrowed, based on the evidence. This may well ultimately assist the Parties in minimising the costs and time associated with litigation, particularly where the matter proceeds to trial.
As such, in circumstances where a Party intends to bring a claim for a shareholder dispute, it will be essential to ensure that the evidence available is sufficient to support the allegations being made.
Essential Procedural Considerations
Articles of Association and Shareholders’ Agreement
As stated above, well drafted documents should provide for the management of the company, the relationships of shareholders and directors and the manner in which disputes should be handled.
At the outset, it is essential that both sides to the dispute understand the contents and requirements of the documents which they have previously agreed.
Alternative Dispute Resolution (ADR) Procedures
Any settlement procedures detailed in the company’s Articles of Association or Shareholders’ Agreement for dispute resolution should be observed.
Irrespective of the contents of the company’s documents consideration must be given to ADR which may be in the form of adjudication, mediation and arbitration.
As the result of the Overriding Objective introduced by The Civil Procedure Rules 1998, civil courts will now expect ADR to be considered as a process prior to the commencement of formal proceedings. Failure to do so may result in financial penalties being imposed.
Specific Example of an Unfair Prejudice Claim
For example, if a Party is alleging that they have been treated unfairly, which may well apply even in circumstances where there are equal shareholders, he would need to have evidence as to what unfair treatment he had received, which may be:
- being excluded from board meetings in which key decisions were made,
- his concerns being ignored,
- one or more shareholders using the company, or their seniority, in a manner that “oppresses” him, because it benefits them as opposed to all shareholders;
- breaches of any formal written shareholders agreements.
How Can We Assist?
Not only are shareholder disputes often hostile in nature, they are frequently conducted in a manner prejudicial to the operation of the company, thereby requiring resolution as quickly as possible.
Any form of civil litigation can be costly and fraught with risk. Spending time at the onset, considering the best interests of the company and all parties together with the information available is essential.
The team at KANGS is highly experienced in providing assistance to both shareholders and directors feeling aggrieved at the manner in which they are being treated and the company business is being conducted. Additionally, we offer support to individuals facing allegations made against them.
Generally, the best financial interests of the company are at the core of most commercial disputes requiring the speediest solution which can be achieved. Our team will proactively advise upon the most effect measures to be taken to lead to the most satisfactory resolution achievable.
If we can be of assistance, please do not hesitate to contact our team using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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