Chris Ross: Breaking the deadlock in partner disputes
WORKING in partnership with other partners, directors and shareholders has many advantages for businesses, but what happens when disputes arise between these parties and how can they be resolved?
Shareholder disputes can arise in a number of situations:
1. A minority shareholder is excluded from the management of the company.
2. The majority shareholders have frequently ignored the rights of the minority.
3. The directors have awarded themselves excessive renumeration whilst refusing to pay dividends to shareholders.
4. A director is not working in the best interest of the company but still takes a salary and dividends.
5. There is deadlock in the company and consequently no decisions can be reached.
6. There is a conflict of interest where one director has shares in another company.
What are the remedies?
Where there is misconduct by directors or within the company generally, a shareholder may bring a claim against any or all of the other shareholders personally for causing unfair prejudice to their interest. The shareholder can apply to court for an order that the company’s affairs are being, have been or will be conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members.
Unfairly prejudicial conduct includes misappropriation of assets, improper allotment of shares which dilutes minority shareholding, mismanagement that leads to financial loss, breach of members’ statutory rights, failure to abide by Articles of Association and non-compliance with the Companies Act 2006. Non-payment of dividends and exclusion of shareholders from management would also be considered unfairly prejudicial conduct.
The court may grant whatever relief it believes is fair in respect of the matters complained of. This may include authorising a claim on behalf of the company, an order requiring the company not to make any specific alterations to its articles without the court’s permission or ordering the purchase of minority shares at a fair price.
A shareholder can also bring what is known as a “derivative claim” in the name of the company in respect of negligence, default, breach of duty or breach of trust against present or former directors. A derivative claim may be brought by any shareholder regardless of the number of shares held or how recently acquired, against any director which includes former or shadow directors or any person implicated in the breach of duty.
A director may be sued for negligence even when he/she has not profited from it. The court will consider whether the shareholder has acted in good faith and whether the conduct complained of is likely to be authorised or ratified by the company. The shareholder must show that the company has suffered a financial loss and any damages awarded belong to the company and not the shareholder. In addition, should the claim be unsuccessful, the shareholder will normally be liable personally for all legal costs incurred.
Where relations have completely broken down, a disgruntled minority shareholder may apply to the court to wind up the company on the basis it is just and equitable to do so.
Instead of a court action, an alternative and less costly means of resolving a shareholder’s dispute would be to use an alternative form of dispute resolution such as mediation.
:: Chris Ross (firstname.lastname@example.org) is managing partner at McKees (www.mckees-law.com) specialising in commercial disputes and helping clients avoid disputes where possible.