10 practical steps to take in a shareholder dispute

There are several ways in which a wayward shareholder/director may be called to account but for many smaller businesses, the potential benefits of pursuing court proceedings will be outweighed by the potential costs. Here are ten practical steps to take.

What is the legal framework of a shareholder dispute?

In order to understand the importance of these practical steps it is worth trying to understand the legal framework. There are likely to be several reference points, but typically the checks and balances may be set out in any of the following

• Articles of Association
• Shareholder Agreement (formal or informal)
• Companies Act – e.g. director duties owed to company
• Your rights as a member of the Board of directors
• Employment law
• Restrictive covenants.

These will set out what the shareholders have agreed, and what the parties may be entitled to do without your say so. They may also limit what you can do without risk of being called to account for acting without authority.

Typical claims which might arise include

• Breach of contract
• “Derivative actions” (covered by ss 260 to 264 Companies Act 2006)
• Allegations of “unfair prejudice” (usually by a minority shareholder)
• “Just and equitable” winding up.

Even if court options are available, it is not always possible to control the way things are being done. The court has some very wide powers, but there are limits on when these can be exercised.

10 practical steps to take

For all these reasons, it can be helpful to focus first on the practical steps you can take to try and protect your position. Here are ten suggestions

1. Check who controls the bank account. Is this set up in the name of the Company? Who is on the bank mandate? Who runs the internet banking? Can you prevent the other shareholder removing funds if you needed to do so? Can they remove your own access? Do you need to change these controls?

2. Reduce your financial dependence on the business. If you are owed a lot of money can you get this repaid at an early stage? Make sure you are not the one who is most financially dependent on the continued success of the business?

3. If you are being paid on account of dividends, get the dividends declared as soon as you can. Alternatively make sure you have a documented record of the basis upon which these payments are being made in this way. Do you understand the potential implications of being paid mostly by dividend? Many company shareholders pay themselves monies “on account of” the profits they hope to make. If that dividend is not later declared, you may end up owing the Company money at the end of the year or if you have to leave.

4. See if you can get an informal idea of how much the company (and, therefore, your shares) might be worth. 

5. Clarify where the value lies. once you understand where the value is in the business, are you clear about who has most day-to-day control of this? For example:

• Who owns and develops any core intellectual property such as IT, trademarks, domain names? Is it all owned by the business?
• Who is responsible for the key client relationships? Can you get more involved?

6. Take steps to prevent confidential information to be taken from the business. Explore practical steps to prevent this.

7. Check who controls updating of Companies House? Can you easily correct any misinformation that might be filed?

8. Think about recording any informal arrangements agreed for running the company (e.g. dividends proportional to earnings or contribution. These can be recorded and agreed informally or discussed at board level. If you are unhappy about the practicalities of your current position, you could suggest having a formal shareholder agreement setting out how things should be done.

9. If you are uncertain of your rights, consider obtaining independent legal advice, or involving an independent third party such as a mediator to help you negotiate your way forward.

10. If you wish to bring matters to a head, you may need to send a letter which sets out clearly the basis for your complaints/concerns and explains how you would like these addressed and when. Note, that it is important to draft this carefully and in order to avoid inflaming emotions which may sour the relationship even more. Focus on the problem, not the people. Focus on the future not the past.

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