Shareholder Disputes

Ian Dawson, Head of Employment, gives his thoughts on some key areas when advising a business (company) on disputes affecting a director/shareholder and how to avoid a number of common pitfalls.

I’m unhappy with the director’s performance, can’t I go down a disciplinary route?

Disputes involving senior employees who are also directors and shareholders need careful handling. It needs to be remembered that the individual has rights, and indeed obligations, as a director, employee and shareholder. Inevitably, these rights are linked and to focus only on the employment procedure could expose the shareholders and also the company to a serious risk of litigation.

Where an individual has rights in all three areas, there can be a significant risk of the shareholder being exposed to actions which are unfairly prejudicial to the interests as a minority shareholder. Often, this could be where the commercial value of the dispute lies, depending on the rights of the shareholder and the value of the business.

What can the company do if there is a dispute?

It is important to establish, from the outset, what contractual documents will apply. This could include the director’s service contract/employment contract. Also, is there a shareholders’ agreement and do the company’s articles of association provide obligations in relation to share transfers and how the shares of an outgoing shareholder would be valued?

The company’s memorandum and articles should be considered. Also relevant, are the rights of the directors and shareholders. If there are concerns about the conduct of a director/senior employee, it is often good practice to address this at board level. In addition, consider whether the shareholders have sufficient voting power to ratify the actions of the board and to consider proposing and passing resolutions for the company to take appropriate professional advice.

This can be important to avoid arguments that the use of company funds is causing prejudice to the minority shareholder and also to overcome arguments that the company has not properly complied with the relevant procedures when considering action in relation to the individual director.

What rights does the company have?

The individual, who is the subject of the dispute, will be subject to the contractual provisions of the service contract. Also, there are statutory obligations on the director under the companies legislation. This includes obligations for the individual to act in the best interests of the company and not to promote the individual’s interests over those of the company.

Appropriate action can include board approval and then invoking the internal disciplinary procedure. There will need to be a careful examination of the respective rights of the employee, director and shareholder to reduce the risk of litigation.

I only want to remove the individual as an employee can I do this?

This would be an option. However, if the individual were to remain as a director, they would still be entitled to be provided with information relevant to their position as a director. Also, if the individual remains as a shareholder, that person would still benefit from any increase in the value of the shares, even if they did not play any active role in the business.

Where there has been a fall out, and, for whatever reason, those involved feel it cannot be reconciled, it is always preferable to look at a strategy which would resolve all claims, including the employment claims as well as in respect of the shares.

It may be advisable that an overall settlement can be negotiated which would include a payment for the shares.

It does need to be remembered, that where the individual is a minority shareholder, there is likely to be a discount for a minority shareholding, unless the individual is able to establish that the business was run as a “quasi-partnership”.

It can often be a good tactical step to deal with the employment claims and agree arrangements for the individual to resign as a director, with an offer to be made for the shares, subject to valuation.

Shareholder disputes can often be protracted and costly. A significant advantage of avoiding litigation, is not just to avoid incurring significant costs, but also to avoid the negative impact that a lengthy dispute can have on the business.

With appropriate advice, a strategy can be formulated at an early stage to look to resolve any dispute and avoid a negative impact on the business and expensive litigation.

Steps can also be taken to remove an individual as a director. However, it needs to be noted that any resolution providing for removal of a director, cannot be passed through the written resolution procedure.

With proper advice and support, difficult disputes can be avoided.

Business “fall-outs” can be very emotional and can be likened to a “corporate divorce” situation. It is also important that the professional advisers can understand and appreciate the personalities involved and help remove the emotional barriers, and focus on practical and commercial resolution.

 

Our team

Ian Dawson

Partner

Head of Employment

Direct Line +44 (0)113 297 7735

Jeremy Shulman

Partner

Employment & HR

Direct Line +44 (0)113 297 7748

Jim Wright

Partner

Employment & HR

Direct Line +44 (0)113 297 8938

Tom Watkins

Associate

Employment & HR

Direct Line +44 (0)113 297 8069