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<p>When running a business, especially in its early days, it may be tempting to dismiss the idea that disagreements between shareholders will ever arise. But it doesn’t pay to have a ‘we’ll cross that bridge when we get to it’ mindset. Shareholder disputes do happen, and when they do, they can be deeply disruptive to day-to-day operations, financial wellbeing, company morale and long-term strategy.</p>
<p>This is especially true of family-run businesses or ventures set up between friends, where emotional ties often make disputes more personal, more painful and harder to resolve.</p>
<p>It’s vital to take proactive measures for handling disputes without undermining the stability of your business. The foundation lies in having clear, legally binding agreements – such as articles of association and shareholder agreements – in place from the outset. When disputes arise, several dispute resolution mechanisms are available that can help navigate the situation smoothly. This article explores how to resolve shareholder disputes while minimising disruption to your business, and how to manage early-stage conflicts.</p>
<h2>Common causes of shareholder disputes</h2>
<p>Whether the disagreement is over finances, responsibilities or the direction of the business, unresolved tension between shareholders can potentially lead to costly legal battles and irreparable damage to the company if not handled correctly. When shareholder disputes arise, they are often the result of:</p>
<ul>
<li>A difference in ideas about the direction of the business and long-term strategy</li>
<li>Unequal contributions of time, effort or capital</li>
<li>Disagreements over profit distribution</li>
<li>A breach of the shareholders’ agreement</li>
<li>Money being unfairly paid out (e.g. where a shareholder takes a salary or dividends without justification)</li>
<li>Alleged breaches of fiduciary duties, such as missing company funds</li>
<li>Personal tensions, conflicts or breakdowns in communications</li>
<li>Conflicts of interest (e.g. where one shareholder becomes involved in another business)</li>
<li>A deadlock in decision-making that affects company operations</li>
<li>Shareholders’ desire to part ways</li>
</ul>
<p>Identifying these triggers early on can help prevent disagreements from escalating. In the 2009 case of <a href="https://uk.practicallaw.thomsonreuters.com/Document/I6FF884C07EAF11E1BB69D79D4EB7FD56/View/FullText.html?transitionType=Default&amp;contextData=(sc.Default)&amp;firstPage=true" target="_blank" rel="noopener"><em>Re Coroin Ltd</em></a>, a conflict over management control between major shareholders in a luxury hotel group underscored how strategic disagreements, when left unchecked, can spiral out of control and result in complex litigation. That dispute in particular dealt with issues such as transfers of shares, whether certain shareholder consents had been properly obtained and the control of board appointments.</p>
<h2>The first steps to consider when resolving shareholder disputes</h2>
<h3>Seek legal advice</h3>
<p>Potential shareholder disputes should be nipped in the bud before escalating further. We recommend that when a party becomes aware of a potential dispute between shareholders, they seek legal advice. Trying to deal with a problem without legal advice may run the risk of only making matters worse. A lawyer can advise on the best course of action to take before the issue becomes a bigger problem, and can help remove any emotional conflict from the situation, which often makes for a quicker resolution.</p>
<h3>Consult the articles of association and any shareholders’ agreement</h3>
<p>The company’s constitutional documents (i.e. its articles of association) should set out the default rules that govern how shareholders conduct their affairs and how the company is governed. Additionally, every business with multiple shareholders should consider having a shareholders’ agreement in place that outlines shareholders’ rights and duties. It’s also worth checking these documents for procedures regarding dispute resolution, including how to address deadlocks in decision-making.</p>
<p>Shareholders’ agreements can be very useful for helping companies manage shareholder disagreements using pre-agreed procedures and mechanisms, and we discuss this in the section below ‘The importance of a well-drafted shareholder agreement’.</p>
<h3>Breaking shareholder deadlock</h3>
<p>It may be difficult to reach a resolution in situations of shareholder deadlock. This can happen when, for example, a company is owned by two shareholders holding 50% of shares each or when multiple shareholders have an equal share of the decision-making rights.</p>
<p>A well-drafted shareholders’ agreement will generally include some form of mechanism to break the deadlock. These can vary in complexity (some are referred to as ‘Russian Roulette’ or ‘Texas Shoot Out’ clauses), but in essence, in the absence of agreement between the parties, the prescribed procedure will usually result in one party having the right to buy out the other party a price determined by the clause.</p>
<h2>The importance of a well-drafted shareholder agreement</h2>
<p>One of the most effective tools in preventing and managing shareholder disputes is a shareholder agreement that has been tailored to the specific circumstances of the company and its shareholders. This document sets out the rights, responsibilities and expectations of each shareholder and will generally provide a roadmap for resolving disputes.</p>
<h3>How a shareholder agreement can prevent disputes before they escalate</h3>
<p>A well-structured shareholder agreement can offer clarity and consistency in decision-making. Key clauses to consider include:</p>
<ul>
<li><strong>Decision-making processes</strong>: clearly define which decisions are board decisions and which are reserved for the shareholders. For shareholder decisions, specify which require unanimous consent and which may be approved by majority vote. Where decision-making is clearly defined, each shareholder knows when they must be consulted, helping to prevent disputes about whether proper procedures were followed or voices ignored.</li>
<li><strong>Dispute resolution mechanisms</strong>: outline steps for handling disagreements, including any deadlocks. Having a clear process in place ensures that disagreements are dealt with constructively and quickly, reducing the risk of escalation or deadlock.</li>
<li><strong>Departure terms</strong>: set parameters for selling shares, valuation methods and rights of first refusal. By establishing how and when a shareholder can leave the business, and how their shares will be valued, it’s possible to reduce uncertainty and avoid disputes over fairness or timing.</li>
</ul>
<p>Setting out expectations at the outset of starting of a business relationship helps prevent minor misunderstandings from growing into major conflicts down the line.</p>
<h2>Addressing situations where there is no shareholder agreement or tailored articles of association</h2>
<p>In the absence of a shareholder agreement or tailored set of articles of association, resolving disputes becomes significantly more challenging. Many companies rely solely on the standard model articles of association, which often lack the detail necessary to handle complex disagreements. In such cases, the default provisions of the Companies Act 2006 will also apply, but this often offers limited assistance on internal conflict resolution.</p>
<p>In <em>Re Blue Arrow plc</em> [1987], lack of clarity around shareholder obligations led to a public and highly damaging dispute. Where a shareholder dispute arises, engaging solicitors early in the process could help manage the situation and avoid lengthy litigation.</p>
<p>In our next article on shareholder disputes, we examine the dispute resolution mechanisms available when conflict escalates beyond the early stages and reaching an agreement between the parties seems unlikely.</p>
<p>To ensure your business is protected from the risk of shareholder disputes and for help drafting a robust shareholder agreement, <a href="https://linnearcms.wpenginepowered.com/get-in-touch/">speak to a corporate solicitor</a> at Linnear Legal today.</p>


How to prevent shareholder disputes from disrupting your business

Shareholder disputes can disrupt your business if not handled early. Learn how to prevent and resolve them with clear agreements and legal advice.

How to prevent shareholder disputes from disrupting your business | Linnear Legal

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