Why are Shareholder Disputes on the rise and what to do to avoid them?


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Shareholder disputes present a challenge to companies that can be as damaging as external threats of litigation. Disputes between shareholders have the potential to cause significant harm to company operation, performance, and reputation. At worst, such disputes can trigger the ultimate demise of a company. 

Typical drivers of disputes include disagreement over the direction of the company, conflicts of interest, terms of shareholder-director's service contract and remuneration.

Shareholder disputes are often exacerbated by the complexities of owner managed and family businesses. Alliances based on family, friendship, and length of service can lead to disagreements stemming from a breakdown in personal relationships. Likewise, complex company structures, such as the involvement of family trusts, and at times a lack of corporate formality, create the risk of problems later down the line. 

Disputes between shareholders arise in both stable and challenging times. However, recent political turmoil, the legacy of the COVID pandemic and the cost-of-living crisis has brought about business, and personal, economic hardship not seen for generations. This financial stress spans all business-types and sectors but places particular pressure on owner managed and family businesses. 

As businesses struggle to rebuild and survive, there has been a rise in disputes stemming from fall-outs due to the contribution or expected contribution from individual shareholders, insufficient dividend distributions and wrongdoings, including breaches of directors' duties. Each director of a company has a number of duties that it owes, in general, to the company of which he or she is a director. If a director does not understand these duties, or acts in breach of them, or acts where there is a conflict of interests, the potential for disputes, and personal liability, increases.

Ideally, disputes in this area can be resolved internally, but escalation to formal methods of resolution is not uncommon. 

With the bumpy economic climate set to continue, what can business leaders do in practical terms to mitigate the risk and impact of shareholder disputes? There are a number of options to consider, some of which are: 

1. Shareholders' Agreement 

A Shareholders' Agreement sets out everybody's rights and responsibilities in relation to their shareholding and when tailored with the Articles of Association, set out the framework for running the company. Shareholders' Agreements cannot guarantee a dispute will not arise, but a carefully drafted agreement narrows the scope for dispute and can provide for a resolution mechanism should fall-outs happen. Such documents are essential to ensuring shareholder disputes are managed and resolved efficiently and effectively, with minimal negative impact on the business. Often, owner-managed and family business lack this level of formality given the relationship of the shareholders. However, it is often these companies that benefit most significantly from such formality (or risk the most without them) when a dispute arises – given the personal connection to the company, which has often passed down generations. The preparation of a Shareholders' Agreement is also an ideal time to remind directors of their duties and to reinforce the obligations that accompany the office of a director.

2. Take Early Advice 

Ultimately, shareholder disputes can be complex, time-consuming and costly. Disputes often escalate as parties do not fully understand their rights and obligations. It is important to take advice from an experienced specialist at the earliest stage of a potential dispute. Ultimately this not only allows for preventative measures to be put in place but also helps manage and reduce the impact. 

3. Alternative Dispute Resolution 

Going to Court can, if successful, end many forms of dispute- but this is often at great economic and personal cost, especially in owner-managed and family businesses. The court's powers are limited and with remedies being at the discretion of the court results cannot be guaranteed.  Utilisation of alternative dispute resolution, such as mediation which can take place before or after court proceedings are commenced, can help resolve a dispute whilst minimising business disruption.  

Our Commercial Litigation team has considerable experience in dealing with shareholder disputes, including at trial, and are currently instructed in relation to multiple high value shareholder actions. Our Corporate team are also able to assist with the preparation of bespoke Shareholders' Agreements and Articles of Association. Both teams are available to provide training for directors.

Should you require any assistance with respect to any such matters, please contact Jamie De Souza or Mat Harvey.

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