Why Do Shareholder Disputes Occur?

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.

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Common Causes of a Shareholder Dispute

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:

  • A conflict of interest arising between shareholders, which means they can no longer pull in the same direction;
  • A majority shareholder does not give consideration to a minority shareholder’s interests;
  • Some shareholders may be limited access to certain company information, such as the financial position of the company or the future plans of the company;
  • Certain shareholders may be refusing to co-operate with other shareholders, or attempt to restrict company operations as set out in a previously agreed business plan; or
  • A shareholder who is also a director may be removed as a director by fellow directors/shareholders in contravention with either the company’s constitution or any relevant shareholder agreement.

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Rights of Shareholders

All shareholders of companies in the UK have, irrespective of the size of their shareholding, the right to:

  • receive notice of General Meetings and inspect the minutes;
  • ask a court to call a General Meeting;
  • not to be unfairly prejudiced;
  • a share certificate;
  • have their name entered on the Register of Members; and
  • inspect the register of directors’ service contracts without charge.

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.

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Resolving a Shareholder Dispute

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.

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Contact Our Dispute Resolution Team

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: 

0161 941 4000