As businesses grapple with prolonged inflationary pressures, constrained supply chains and material costs, shareholder disputes are on the rise as stakeholders find it increasingly difficult to stay aligned.
In this article Stuart Matthews, Partner and Jonathan Holloway, Associate in Exeter's Corporate team and Alex Sharples, Managing Associate and Annie Joseph, Associate in Exeter's Commercial Litigation team, explore the current uptick in shareholder disputes with a particular focus on the challenges posed to businesses in the South West and how businesses and in particular family-run and owner managed businesses can seek to minimise the risk of internal discord and scope for such disputes and ultimately successfully navigate them should they occur.
What are shareholder disputes?
A shareholder dispute, as the name suggests, is a dispute between the owners of the company. Not only are these disputes highly stressful for the individuals concerned, but they can take up a great deal of management time and can have devastating and even fatal consequences for the business itself.
Whilst most shareholders have the same end goal i.e. they want to see their business succeed and provide a return on their investment, opinions can differ as to the best way to achieve that goal particularly in times of economic uncertainty. Such differences can often lead to disputes which, if not resolved promptly, can lead to positions becoming entrenched and the once cordial relations between parties becoming intractable.
Shareholder disputes can arise in a number of circumstances, for example: a minority shareholder may be excluded from the management of a company; a group of shareholders may act in a way that harms the interests of other shareholders; a shareholder who is also a director may be acting fraudulently or in breach of duties owed to the company; shareholders may disagree on the company’s future direction. Corporate deadlock and with it business/operational paralysis can result if the relevant tools and mechanisms are not there to deal with these scenarios.
Prevention is certainly better than cure in these scenarios. Moreover, the importance of early intervention when issues arise cannot be overstated and it is crucial for businesses and owners to seek independent legal advice at an early stage.
Why are South West businesses in particular seeing a rise in such disputes?
Surveys conducted by the Institute of Chartered Accountants in England and Wales (ICAEW) and Lloyds Bank have revealed that business confidence in the South West is growing and has at long last returned to positive territory.
Confidence in the South West is still lagging behind the UK average with businesses in the region experiencing some challenges more acutely than other areas of the country, the survey has found.
Whilst it is hoped that businesses in the South West will continue to deploy the same resilience that has carried them through the past few years, it is fair to say that many businesses face significant challenges particularly in the Retail, Leisure and Tourism industries, which were hardest hit by the Covid-19 pandemic and the inflationary tail which has followed, increasing operational costs significantly as well as posing both supply and staffing pressures.
These factors combined put commercial and consumer relationships under strain and may lead to disputes when businesses/companies try to negotiate or exit their existing contracts in order to remain competitive leading to a rise in external litigation. Those strains can also fuel internal conflicts and lead to discord between owners of the business who may have differing views as to how such pressures should be managed.
The South West is home to a great number of agricultural or family run/owner-managed businesses which have been passed down through the generations and either do not have a shareholder agreement in place or the articles of the company do not cover what should happen in the event of a dispute/deadlock which can pose its own set of unique challenges.
Many such business owners often do not consider they require this level of formality given the close and personal nature of their relationship and the fact that their business is underpinned by trust. However, all businesses, whatever the model or structure, benefit from having clearly defined and carefully drafted shareholder agreements and articles of association to minimise the threat of potential acrimony and/or a breakdown in the relationship in the event of a potential dispute. These documents provide the tools businesses need to navigate any internal issues that may arise.
Top tips for preventing and managing shareholder disagreement
- Prevention is better than cure: Having a clearly defined shareholder agreement in place regulates everybody's rights and responsibilities in relation to their ownership of the business. This should also be supported by clearly defined articles of association for the company which provide an effective framework for the management of the company. Whilst these agreements cannot negate the possibility of a dispute arising, it can narrow the parameters of potential disputes and provide certainty as to rights and obligations and mechanisms for how any disputes should be dealt with.
- Start succession planning early: Disagreement between shareholders often arise if there is a breakdown in the relationship between two or more shareholders, or if control of the company is handed down from one generation to the next. Early succession planning and regular communications between shareholders and potential future shareholders will minimise the chance of a dispute arising.
- Communicate from the outset: You may be able to avoid a full-blown dispute by communicating with other parties as early as possible, and before there is a complete breakdown in the relationship. It is harder to get someone to come to the table once a full-blown dispute has arisen, especially in family run or owner-managed businesses where emotions may be running high.
- Identify your objectives and seek early legal advice: Early access to legal advice is crucial in helping to resolve disputes amicably and at an early stage. Our expert team of lawyers have experience in resolving disputes and preventing disputes and can provide clear strategic advice and creative solutions to resolve and prevent such disputes.
- Understand the risk of exclusion: A common allegation in shareholder disputes is that a shareholder has been excluded from management of the company by another shareholder or shareholders. Exclusion from management can take the form of excluding from directors' meetings (assuming all shareholders are directors) or being excluded from key decision-making for the business. Understanding what you can and cannot do as a director and/or as a shareholder is crucial and early legal advice is recommended so you can chart the right path.
- Always put the interests of the company as a whole ahead of your own interests: Directors have a duty to act in good faith and in the best interests of the company. The consequences of a director making the wrong decision are severe could lead to their removal, a personal claim against them for misfeasance and/or a derivative claim. Remember that there must always be a commercial reason for a transaction – if in doubt, seek legal advice and ask yourself is the decision in the best interests of the company as a whole?
- Keep detailed and proper records: Good corporate governance requires keeping detailed records and this can also help evidence your position. You should keep in mind that shareholders have extensive rights to access the books and records of the company and in the event of disagreement, the court will often be asked to make orders allowing access to the company’s books and records.
- Don't use company funds in the event a dispute arises between shareholders: Parties should fund their own legal costs. Using company funds to defend a shareholder dispute is often considered to be oppressive conduct.
- Consider Alternative Dispute Resolution: Where a dispute is unavoidable, alternative dispute resolution such as mediation, introduction of a independent third party or a round table can lead to an early resolution and help to preserve confidentiality and minimise any reputational risk.
How can we assist?
The Trower's Exeter office is one of the biggest legal teams in the South West. We have in excess of 160 people in Exeter and sit as part of an international law firm of over 1,000 people, We are full service in our scope and capability and regularly advise major businesses and their shareholders across the South West and beyond. Our aim is to provide concise advice targeted at addressing and resolving issues and coming up with creative solutions tailored to the unique needs of your business.
When it comes to protection business operations and shareholder relationships, prevention is always better than cure and early intervention and advice is therefore crucial. Forward planning can help your company to prevent potential disputes before they occur and thrive.
Our team of expert corporate and commercial lawyers can work together with your business to put in place the documents and mechanisms to prevent future disputes before they arise.
However, should a dispute prove unavoidable, then you can be rest assured that we have the strategic expertise to advise you on how to best protect your interests and those of your business.
