What Happens When Shareholders Can’t Agree?

When a company’s shareholders don’t agree on key business decisions, it can cause extensive disruption to the business and those involved. In the most serious cases, it can even lead to the exit of a shareholder or the failure of the business.

In the ideal scenario, a shareholder dispute can be easily resolved by referring to the shareholders’ agreement. However, not all businesses have a shareholders’ agreement and they do not always cover every eventuality. It is therefore essential to understand the different options for resolving shareholder disputes quickly while minimising any short-term and long-term impact on the business.

In this article, we cover:

• Potential problems that can arise when shareholders don’t agree
• What a shareholders’ agreement is
• How a shareholders’ agreement helps to prevent disputes
• What should be included in a shareholders’ agreement
• Different methods for resolving shareholder disputes
• How a specialist commercial solicitor can provide expert assistance to businesses during shareholder disagreements

Looking for immediate help with shareholder dispute resolution? Please get in touch and our experienced commercial lawyers will be happy to advise.

What problems can occur from not having a shareholders’ agreement?

Examples of issues that may occur where there is not a shareholders’ agreement in place include:

• The sale of shares to a third party without the agreement of all shareholders
• Returns are not split in a way that reflects the level of investment made by each shareholder
• Disputes between shareholders without set procedures on how they should be resolved
• The sale of shares can be blocked by minority shareholders

What is a shareholders’ agreement?

A shareholder’s agreement is a legally binding contract between the business’s shareholders. Shareholders are those who own the business, but this does not necessarily mean they will have a say over every aspect of how the company is run.

The agreement sets out what rights and responsibilities individual shareholders have, including what decisions they need to be consulted on. It will also set out how those decisions should be made, including what happens in a ‘deadlock’ situation, where shareholders controlling equal numbers of shares disagree on an issue.

How does a shareholders’ agreement help to prevent disputes?

A shareholders’ agreement can include provisions to avoid many common sources of disputes e.g.

• Protecting minority shareholders by giving them the right to be involved in certain key decisions
• Specifying how deadlocks should be resolved
• Stating how shares can be sold transferred (e.g. that they must be offered to existing shareholders before being sold to a third party)
• Requiring alternative dispute resolution methods such as mediation to be attempted before court litigation can be initiated

What should be included in a shareholders’ agreement?

Examples of what a standard shareholder agreement will contain include:

• How important decisions will be made
• The rights and obligations of each shareholder
• Provisions over confidentiality and any restrictive covenants
• How disputes will be resolved
• Capital contributions
• How shares will be dealt with, for example, when a shareholder dies, retires from the business, becomes bankrupt, etc. whether they will be sold or transferred to existing shareholders
• Conflicts of interest
• Protection for minority shareholders

How can you resolve a shareholder dispute?

If a shareholder dispute cannot be swiftly resolved with reference to a shareholders’ agreement, then it is likely one of the following approaches will be needed:

Private negotiation – Where the shareholders work together to agree a resolution. The shareholders’ legal advisers may sit in on the negotiations or provide advice before and after on key points and the suitability of anything agreed.

Mediation – The shareholders and their legal advisers will meet with a trained commercial mediator who acts as a neutral third party to help them agree an outcome. This usually takes place in a single session over a half day or whole day.

Arbitration – The shareholders can agree to place the decision into the hands of an arbitrator who will review the various parties’ arguments and decide how the matter should be resolved. This is a bit like going to court, but is usually much faster, less costly and takes place in private.

Court proceedings – If a decision cannot be reached by any other method, it may be possible for the shareholders to take the matter to court for a judge to decide. This can be very costly and there is often a long wait for a court date, not to mention the potential for negative publicity. Taking a shareholder dispute to court should, therefore, be an absolute last resort.

How can a solicitor assist during a shareholder dispute?

A good commercial lawyer will be able to make sure you fully understand your rights and the potential risks involved with pursuing a particular dispute. This can help you make an informed decision about how you want to move forward.

A shareholder dispute solicitor will have the experience and specialist expertise to know the various routes for resolving disputes. They should be able to increase your chances of finding an amicable outcome that satisfies everyone involved.

A solicitor can assist with the various different methods covered above for resolving shareholder disputes. They can help to push the involved parties in the right direction and minimise the risk of matters escalating further.

Here to Help

Whether you need assistance in setting out a shareholder agreement for your business or need professional legal advice and support for a shareholder dispute, our expert commercial team can provide assistance.

Longmores’ Dispute Resolution team are highly experienced. To discuss how we can help, please get in touch with John Wiblin, Partner and Head of Dispute Resolution.

Our team have years of collective expertise in a range of shareholder matters, from those straightforward, such as drafting a shareholder agreement, to those more complex, including representing clients during court litigation.

No matter your situation, we can provide tailored advice and practical guidance, always ensuring the business’s interests are protected.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.