Shareholders are individuals who own shares within a company. Essentially, shareholders are, collectively (assuming that a company has more than one shareholder), the owners of the company.
Consequently, shareholders have a vested interest in the commercial success or failure of a company. Success will of course mean that the share valuation in a company rises.
However, given the financial consequences in play in regard to the shares of a company, feelings between the shareholders can often become heated where shareholders may disagree on the direction a company should be heading in, or indeed if certain shareholders feel that they are being marginalised by their co-shareholders.
In these situations, disputes can arise and escalate to the point where legal intervention may be necessary to resolve the disagreement.
The reasons as to why shareholders are engaged in a dispute often stems from a few common issues encountered in the running of the company. These may include, but are not limited to:
All shareholders of companies in the UK have, irrespective of the size of their shareholding, the right to:
However, the size of a shareholding does become relevant in relation to certain decisions and operations of a company. Minority shareholders, therefore, can still significantly impact certain situations, provided that a private bespoke shareholder agreement does not restrict such power.
For example, shareholders with a shareholding greater than 25% can block a special resolution, whilst shareholders with a shareholding greater than 10% can block consent to short notice for a general meeting.
Conversely, majority shareholders in a private limited company hold significant power depending on the size of their shareholding. Ultimately the greater the shareholding, the greater power the shareholder can exert. For example, a shareholding of more than 90% will permit the shareholder to consent to the short notice of a general meeting.
Further, a shareholding of 75% or more will enable the passing of a special resolution, whilst a shareholding greater than 50% will enable the passing of an ordinary resolution.
If two shareholders jointly own a company, i.e. a 50% stake each, then disputes can lead to a situation known as deadlock if no agreement can be reached. Most shareholder agreements should cater to such situations by inserting a dispute resolution clause. This type of clause will provide direction for what should happen in situations involving deadlock.
Court proceedings are an option for resolution; however, they should only be a last resort for the parties. Instead, Alternative Dispute Resolution (ADR) should first be attempted via an independent third party which can lead to a quicker and more cost-effective resolution.
One option of ADR would be to engage in mediation – a process whereby the parties negotiate via the medium of an independent mediator. A shareholder’s agreement does not need to stipulate that ADR take place for it to be an option, but it is still good practice to do so.
You can contact our specialist dispute resolution team for legal support on the topics discussed in this feature and any other business dispute-related assistance you may require. If in doubt, please seek advice. You can contact the team on:
