Shareholder Disputes - First Steps

Whenever shareholders find themselves in dispute with other shareholder(s) in the company, it can be a lonely and confusing situation.  The law governing the way in which companies should be run and the way in which this has been interpretated by the Courts over the years is not usually something with which shareholders regularly have to concern themselves.  However, when a dispute appears on the horizon, the first steps that need to be taken are often relatively straightforward.  The shareholder needs to gather together the documents that may have a bearing on the shareholder relationship and these will typically include:

  1. The Articles of Association (and possibly a Memorandum of Association). Copies can be obtained from Companies House if no copy has been retained;

  2. A shareholders’ agreement;

  3. Any Director’s Service Agreements or employment contracts;

  4. Any agreements between the parties varying the terms of any of the above;

  5. Any Deeds of Adherence that may have been entered into. These may also have varied the provisions of the original documents, but will have ensured that any shareholders who may have joined later have also agreed to be bound by the terms of the original agreement and any variations.

It is not uncommon for one of the original shareholders to have been the primary driving force in preparing many of these documents.  The consequence of this can be that the signed copy still remains either with that shareholder or with the solicitors for that shareholder or for the company.  It is not uncommon for parties themselves to find that they do not have copies of all of the documents that they may have signed at the outset.  If a dispute looks likely, it is important to get hold of these copy documents as soon as possible as they will provide the essential reference points for determining what the parties’ rights and obligations are as between each other. 

It is only by looking at these documents that it is possible to assess what the other parties have agreed should be the relationship between them.  It may become immediately apparent that the shareholder has a strong, or correspondingly weak, negotiating position when viewed against the backdrop of these documents.

In certain companies (particularly those with two equal 50/50 shareholders), previous case law can impose a further level of obligation between the parties and requires that they deal with each other fairly.  The Courts will often conclude that the original intention of the parties was to create a “quasi-partnership”.  If the Courts conclude that this is the position then they recognise that this can create a legitimate expectation on the part of each of the shareholders that they should be entitled to remain as an employee and a Director of the company for so long as they remain a shareholder of the business.

Since one of the remedies available to a shareholder who finds himself in dispute with his fellow shareholder(s) can be the bringing of an unfair prejudice petition, it will also be essential for that shareholder to start putting together a summary of the circumstances in which the company was formed, as well as any of the recent events which have led to them thinking that they are not being treated properly.  If at any point an application needs to be made to the Court, this background will be an important part of the factual matrix and it is essential that the significant recent events are properly recorded and examined as to their significance within the context of the whole relationship. 

This process of gathering the evidence is an important first step in determining what the rights of that shareholder may be and, consequently, what courses of action may be open to him/her in taking steps to resolve the dispute.