Shareholder Disputes: Navigating Conflict

When running a business, there are various challenges and issues that arise, and unfortunately, disputes between shareholders can be one of them.
Conflicts such as this can impact any size company, and tensions can soon escalate beyond internal resolution if not dealt with swiftly. Thankfully, there are structured options in place to address and resolve shareholder disputes.

In this article, we will take you through the common causes of shareholder disputes, what options are available to reach a resolution, and best practices that can help to avoid a problem in the future.

Shareholder disputes can stem from a wide range of issues, including:

• Breach of shareholder agreements
• Unfair prejudice or exclusion from management (if dual role of shareholder and director)
• Disagreements over dividends or financial strategy
• Misuse of company funds or assets
• Deadlock in decision-making (particularly in 50/50 companies)
• Removal of a director or officer

If left unresolved, these issues can have serious consequences for a company, including the disruption of operations, financial loss, reputational damage and a negative impact on employees.

For many businesses, the initial step of discussing the issue internally can sometimes resolve matters. However, if internal efforts fail, there are alternative options that can be considered including the issue of proceedings and alternative dispute resolution (ADR) such as Mediation.

1. Unfair Prejudice Petition

A shareholder may apply to the court for relief, if the business is operated in a manner unfairly prejudicial to their interests.

Remedies available include:

• An order for the majority to buy out the minority shareholder’s shares at a fair market value
• Regulation the conduct of the company’s affairs in the future
• Compensation or other relief

2. Derivative Claims
If a director is believed to be in breach of their fiduciary duty, shareholders can bring a claim on behalf of the company. However, in order to do this, permission must be granted by the court.

3. Just and Equitable Winding-Up
If all other efforts to resolve the dispute have been unsuccessful and deemed irreconcilable, the last resort may be to close the business.

As well as the options available through litigation, it’s important to also explore possible, more efficient or cost-effective, methods such as ADR. This can include mediation, arbitration, or expert determination and are usually explored before or alongside court proceedings.

Advantages of ADR include:

• Confidentiality
• Cost savings
• Quicker resolution
• Preserving business relationships

If you have a shareholder agreement in place, it should include clauses relating to ADR with details of what would happen in the event of a dispute. These are put in the agreement with the aim of avoiding formal litigation.

Although there are a number of ways to resolve a shareholder dispute, prevention is better than action. Ensuring your business follows best practices and has the right agreements in place is the best way to avoid a future dispute and set out clear processes on what steps to follow, should one arise.

Best practices include:

• Drafting clear shareholder agreements outlining roles, rights, dividend policies, exit mechanisms, and dispute resolution processes.
• Ensuring transparency in decision-making and access to company information.
• Regular communication between shareholders and directors.

Shareholder disputes can create difficulties for even the most robust companies so it’s imperative to seek legal advice to help protect the business and its stakeholders. Our expert Litigation and Dispute Resolution team are here to help. Contact them today to book your free 30-minute consultation.

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