Finding a pragmatic solution to shareholder disputes

Date Added 04.08.15

In my busy commercial disputes practice, I find that nearly as many disputes involve internal issues between shareholders and directors as between external parties. The cause of strife can be numerous, but there are several common themes;

  • Diversion of sales to a shareholder’s other business.
  • Disagreement over future strategy and direction.
  • A feeling that one party is not pulling their weight.
  • Differences over remuneration.
  • Personality clashes.

If a shareholder has to resort to legal proceedings it is often the case that relationships have broken down and there is a pressing need to find a fair solution by which the aggrieved shareholder can exit the business. An exit generally involves the sale of the departing shareholder’s shares to either a third party or, more commonly, the remaining shareholders.

Whilst appearing straightforward on paper, determining the price for the departing shareholder’s shares can be a difficult and contentious issue. If a valuation cannot be agreed, an independent valuer will have to be appointed. The level of specialist expertise will depend on the nature of the company’s business and its market place.

Finding a pragmatic solution to shareholder disputes

In my experience, a contentious issue can be the level of disclosure of financial information which should be made available to the parties and the valuer. Where all shareholders are still involved in the business, the departing shareholder will tend to have a good idea of the state of the business. However, where a minority shareholder has been excluded from the management of the company for some time, the extent of disclosure of financial information to the excluded shareholder needs to be agreed or subject to a Court application before the valuation exercise can be undertaken.

Another difficult issue is the extent to which the market value of the departing shareholder’s shares should be adjusted to compensate for alleged wrongdoing by any shareholder. Where allegations of wrongdoing are contested, both sides will need to take a view if a buy out is to be negotiated without Court action.

It is not always the case that the remaining shareholders will have the means to purchase the departing shareholder’s shares at the price determined by the valuer or by agreement. Prior to any buy out negotiation, thought will need to be given as to whether and how sufficient funding will be raised. It may be that payment has to be made over a period of time. This raises issues such as when the share transfer should take place and whether any security should be required in the meantime.

The tax implications of a buy out should not be overlooked, notably the impact of Entrepreneur’s Tax Relief. Where the departing shareholder has already ceased to be a director either through resignation or by having been voted off the Board, the departing shareholder may be deprived of certain relief and suffer an increased tax burden. Tax advice needs to be taken sufficiently in advance of any settlement discussion.

Many of the above issues can be avoided or mitigated if the shareholders enter into a well-drafted and comprehensive Shareholder Agreement at the outset. There can be a reluctance to invest in the cost of preparing a Shareholder Agreement. However, in my experience, the cost of dealing with disputes further down the line far outweighs the initial cost of a Shareholder Agreement.

To resolve a shareholder dispute out of Court involves compromise on both sides. A realistic view needs to be taken as to the value of the shares in question and the resources of the remaining shareholders to acquire them. Shareholder disputes are an unwelcome distraction from the management of the business itself. If they are allowed to continue without a concerted attempt at early settlement, the value of the business itself can quickly be eroded.

There is invariably a personal element to these kinds of disputes given that the parties are likely to have been involved in the management of the business and feel that they have a personal stake in it. If a settlement is to be achieved, all parties need to strive for objectivity. In my experience, a pragmatic commercial approach pays dividends in the long run by allowing the parties to move on and focus on new challenges and opportunities.

The Commercial Dispute Resolution team at Tollers can be contacted on 01908 306934 

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