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Unfortunately however, sometimes these critical relationships deteriorate or break down, causing distress to those involved and difficulties in relation to decision-making and the general day to day operation of the business.
We understand that shareholder disputes, partnership disputes and disputes between directors need to be resolved quickly in order to minimise their impact on the running and success of the business. One of the key factors in achieving the resolution of these disputes is understanding the respective concerns and positions of the parties involved. Communication can then follow which allows the parties to use ADR to explore resolution options and hopefully, reach a satisfactory settlement or compromise.
If it is not possible to reach a settlement or compromise, it may be necessary to escalate the dispute to involve the Court and commence a formal litigation process. Such processes might include the following:
Minority shareholders often have very little power over the management of the company. However section 994 of the Companies Act 2006 gives shareholders the right to make an application to court where:
• The company’s affairs have been or are being conducted in a manner that is unfairly prejudicial to the interest of all or some of the members of the company; or
• An actual or proposed act or omission is or would be so prejudicial.
Unfairly prejudicial conduct
There are two aspects for conduct to be seen as unfairly prejudicial. It must cause prejudice or harm to an interest of some or all of the members of the company and it must be unfair. Importantly, the petitioner must be worse off as a result of the conduct. The court will take into account the legitimate expectations of the shareholder in relation to the conduct complained of. For example, whether the member could have expected the directors to behave in a certain way due to rules and directions contained in the articles of association. In assessing whether the conduct is unfairly prejudicial, the court will take an objective view.
Examples of unfairly prejudicial conduct are:
• Failure to pay dividends to the shareholders;
• Exclusion from management where there is a justified expectation of involvement;
• Breaches of the articles of association;
• Majority shareholders awarding themselves excessive remuneration; and
• Inequitable conduct.
The petitioner does not have to show that they have been treated more unfairly than other shareholders; it can be sufficient that all shareholders have been treated equally in an unfairly prejudicial way.
There are various remedies listed in the Companies Act that the court may decide to make provision for, however this does not preclude the court from making other orders as it sees fit. The most common remedy is for the court to order that the shares of the petitioner be bought by other shareholders or by the company itself. Other orders that the court can make include:
• Regulate the conduct of the company’s affairs in the future;
• Require the company to refrain from or carry out an act;
• Authorise civil proceedings to be brought in the name of the company; and
• Prohibit the company from making changes to the articles of association.
Shareholders may bring a derivative action when a wrong has been committed against the company but the directors are unable or unwilling to pursue it themselves. Under the Companies Act 2006, derivative actions gives the shareholders the power to challenge the acts or omissions of a director or third party when it involves negligence, default, breach of duty or breach of trust.
After the claim has been issued an application must be made to the court to continue with the claim. Permission is considered in two stages. Firstly, the applicant must show that they have a prima facie case. This stage is used to weed out any vexatious claims and does not involve the company or the directors. However, the company must be notified of the application.
If the claim is not dismissed at the first stage, the shareholder will then have to attend a hearing and show that their application is strong enough to receive the court’s permission to continue. The company will be involved in this stage and will also present evidence.
The application will be automatically dismissed if the court considers that a person acting under the duty to promote the success of the claim would not pursue the claim or the act or omission was authorised or ratified by the company. There are various other factors which are considered at this stage, including:
• Whether the shareholder is acting in good faith;
• Whether the company has decided to pursue the claim;
• Whether the member has a cause of action that they can pursue in their own right; and
• The views of other shareholders who have no personal interest in the application.
Multiple derivative actions
Shareholders can pursue an action against a subsidiary of the parent company if they have shares in the parent company. This also extends to pursuing a cause of action against the subsidiary of the parent company’s subsidiary. These claims are called ‘double’ and ‘triple’ derivative claims.
Multiple derivative claims do not follow the same system as other derivative claims, however, as they are still governed by common law principles and not the Companies Act 2006.
The shareholder who brings the claim must bear the costs of doing so. However, the court can order that the claimant should be indemnified for costs by the company. The court is likely to order this if the claim could have reasonably been pursued by the directors, if the claimant’s only interest in the outcome of the claim is as their capacity as a shareholder and that the benefit from the action will accrue to the company.
Shareholders can petition for the winding up of a company on the grounds that it would be just and equitable to do so. The authority for this is s122(1)(g) of the Insolvency Act 1986 and it is generally considered a last resort.
Who can present a petition?
The Insolvency Act gives the categories of people who may present a petition for just and equitable winding up:
• the company;
• the directors;
• any creditor (including any contingent or prospective creditors); and
• shareholders and other contributors who meet certain requirements.
In the vast majority of cases it is a minority shareholder who presents the petition due to the grounds which must apply for the petition to be successful.
The grounds under which this type of petition may be presented are not closed so there is no finite list. The presenter must show first of all that they have sufficient interest in the winding up. They must demonstrate that there will be a tangible benefit ie. that there will be a monetary surplus after the winding up. This will not be met if the company is insolvent and so this petition is unsuitable under those circumstances.
The court will look at each case on its own merits, however common grounds include:
• Exclusion from management- where the minority shareholder has been wrongly excluded from the management of the company;
• Mismanagement- there has been a loss of confidence on the part of the shareholder in relation to the way that the directors or managers have been managing the company, for example the directors have awarded themselves excessive remuneration whilst refusing to pay dividends to the shareholders;
• Deadlock- where decisions cannot be made due to a deadlock within the company; and
• Loss of substratum- the company can no longer pursue its original purposes, either because it has achieved them or otherwise.
Even if the Court considers that a ground has been established, it may refuse to grant the petition if there is an alternative remedy available and the petitioners are acting unreasonably in petitioning to have the company wound up instead of pursuing the alternative.
A warranty is a contractual statement, the breach of which can give rise to a claim for damages. In relation to warranties for the sale of shares or a business, they are statements in the contract regarding the business’ condition and financial standing. They offer some protection to the buyer who is often exposed to considerable risk when purchasing shares and assets of a business. Warranties should not be relied on in place of due diligence, but instead offer additional protection and remedies in the event that the business assets or potential are not as expected.
Warranties are usually included in the contract in a separate schedule. What the warranties cover will depend on whether you have bought the shares or assets of the business, but they generally include many different aspects of the business, including assets, employees, accounts and tax.
Indemnities may also be used in the sale of shares or assets, but they are different to warranties. A claim for breach of warranty will only be successful if the buyer can show that it caused a reduction in the value of the business acquired. However, a breach of indemnity does not have to cause a loss of value of the business for a claim to be successful. You can recover damages for breach of indemnity to cover other costs not related to loss of value.
Warranty claim and limiting liability
A buyer may find that after they have purchased the business, its affairs are not quite what they expected. If the seller made a warranty that turns out to be untrue, the buyer can make a claim for breach of that warranty to recover damages for the loss of value of the business that has resulted from the breach.
The seller will often try to limit their potential liability under warranties by restricting the circumstances under which a claim can be made and the value of the claim. This includes:
• Knowledge. The seller will usually qualify their liability on an awareness basis. Therefore they would not be in breach of a warranty if they were unaware of an issue or circumstance at the time of making that warranty. This is usually achieved by including the words “so far as the seller is aware” in the warranty clause.
• Financial caps. The seller can also place financial limits on claims in order to limit the extent of their liability. A minimum limit for claims will prevent the buyer bringing low-value claims and a maximum cap will limit the amount the buyer can claim in damages. The maximum cap is usually the total consideration received for the business.
• Time limits. A time limit can be placed on bringing a claim- this is usually 2 or 3 years. However, any warranties relating to tax are normally subject to longer periods as HM Revenue & Customs has 6 years from the end of a tax year to investigate.
Disputes can arise between the directors of a company for many reasons. For example, the directors may disagree over the direction the company should be going in, there could be problems with the performance of one of the directors or removing a director from the board. Importantly, claims against directors who are acting wrongfully can only be brought by the company itself and not shareholders or other directors. Shareholders do have some methods of recourse, however, such as derivative actions and a minority shareholder petition
The articles of association will usually detail how disputes will be dealt with. Mediation is often used as it can prevent the dispute from escalating unnecessarily and is often more cost and time effective.
The most common disputes that arise regarding a partnership are liability and departure. Partners are financially liable for the partnership and so a third party can make a claim against both the partnership and the partners themselves. A dispute may arise about how liability is proportioned. Partnership disputes also occur when one or more of the partners want to leave the partnership. Disagreements may arise over the terms of their departure. For example, they may want to withdraw any money that they invested in the partnership, which could cause a problem for the business and the remaining partners.
The way that partnership disputes will be dealt with depends on whether there is a partnership agreement. Most partnerships will have such an agreement, however there may be some circumstances where two or more people informally enter into business together but may still be considered to be in a partnership. This may make any dispute that arises more difficult to resolve as there will be no guidance from the partnership agreement.
Companies can be dissolved or struck off the Companies Register for various reasons. When this happens it means they no longer exist in a legal capacity. However, it is possible to restore the company back on to the Register. There are two ways to restore a company- administration registration and restoration by court order.
Reasons for restoration
It may be desirable for a company to be restored for a number of reasons. The most common reasons are when:
• A company has been struck off the Register for failing to file annual returns and accounts but it continues to trade;
• There is an unresolved claim against the company and in order to obtain compensation or redress the claimant has to restore the company; and
• The company had title to an asset that is of value of importance to another company.
This method of restoration is where an application is made to the Treasury Solicitors and Companies House. This is often used where the reason that the company needs to be restored is that it has been struck off for not filing company documents at Companies House. It is a relatively inexpensive and fast way to restore a company.
There are certain conditions which must be met for the Registrar to restore the company:
• The company must have been carrying on business at the time it was struck off;
• If any of the company’s property has vested in bona vacantia, the Crown representative has provided written consent to the restoration; and
• The company has brought any outstanding statutory documents up to date and has paid any penalties that apply.
There is a £100 fee payable to Companies House. If applicable, the company must also pay any penalty fees for the late filing of accounts at Companies House.
Court order restoration
Restoration by court order is often used when the company has been struck off by the directors voluntarily and it is not possible to use the administration method. However it can also be used where the company has been struck off for not filing documents at Companies House, as long as it was carrying on business at the time it was struck off. In circumstances other than these, the court can restore the company if it considers it just to do so.
The appropriate Court fees apply. The penalty fees for late filing of accounts that are applicable in administration cases may also apply.
The effects of restoration
If the company is successfully restored, a notice of restoration will be published in the Gazette. The company will be deemed to have continued as though it had not been struck off or dissolved.
Sometimes it will not be enough to simply restore the company to the Register. The court has the power to make provisions to enable the company and any other persons to be put back in the position they would have been if the company had not been dissolved or struck off. In the case of administrative restorations, a separate application would have to be made to the court within 3 years from the date on which the company was restored.
Franchise agreements are often very complex meaning that disputes can often occur. Our specialist solicitors provide professional, practical and clear advice to both franchisees and franchisors on a wide variety of contract disputes.
There are a variety of issues that can arise after entering into a franchise agreement, including:
• Breach of the agreement.
• Misrepresentation. This usually relates to false representations made by the franchisor about sale projections or overheads, which the franchisee relied on.
• Intellectual Property issues. A claim for breach of intellectual property rights can arise if the franchisee uses the franchisor’s name, brand or logo without specific permission.
• Termination issues. There may be points of dispute when a franchisee wants to terminate the agreement with the franchisor.
How to resolve the dispute
If the parties want to resolve the dispute and continue with the franchising agreement, it is important to resolve the dispute amicably. The best approach in these circumstances would be to mediate. A mediator is an independent party who seeks to offer a solution to the disagreement and assist in reaching a settlement. The nature of mediation means that it is not as confrontational as other means of dispute resolution so will help to preserve the business relationship.
However, there may be some circumstances where mediation would be impossible or is not desired. If the relationship between the parties has completely broken down, then mediation would be unlikely to be successful. In these instances, it may be that the franchisor or franchisee wants to seek repudiation of the franchise agreement, thus bringing the business arrangement to an end.
Directors are in a position of responsibility and trust and must carry out the company’s business having regard to the best interests of the company and the shareholders. They must put the interests of the company over their own personal interests.
A director owes certain duties under both common law and the Companies Act 2006. The Companies Act codified many of the common law duties, however they are still relevant when interpreting and applying the statutory duties.
The seven general duties under the Companies Act are:
• Duty to act within powers.
• Duty to promote the success of the company.
• Duty to exercise independent judgment.
• Duty to exercise reasonable care, skill and diligence.
• Duty to avoid conflicts of interest.
• Duty not to accept benefits from third parties.
• Duty to declare interest in proposed transaction or arrangement.
In certain circumstances, the above duties can be set aside by authorisation of the members. For example, the duty to avoid conflicts of interest can be complied with by disclosing such an interest to the directors who may then authorise and proceed with the transaction or arrangement.
A director must also act in accordance with the fiduciary duties to act in good faith in the best interests of the company and to use their powers solely for the purpose for which they were conferred. Directors must also comply with the duties to keep accounts up to date and maintain records.
Consequences of the breach
The duties are owed to the company and so only the company can enforce them. However, shareholders may be able to bring a derivative action against a director in certain circumstances.
Remedies and penalties for a breach of duties include:
• An injunction;
• Setting aside the transaction;
• Disqualification of the director; and
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