Shareholder and partnership disputes

In an owner-managed company the shareholders and the directors are usually the same two or three people, so a shareholder dispute is really a falling-out between the people who run the business. The common versions are a 50/50 deadlock where nothing can be decided, a minority shareholder who has been pushed out of management and stopped receiving information or dividends, and a founder who wants to leave where nobody can agree a price.

On shareholder disputes I can give initial advice on where you stand and help with the negotiations, and if what’s needed is a negotiated exit then I’ll handle that as a transaction. I don’t litigate, so if it becomes a full dispute, with injunctions, court petitions or a contested claim, it goes to a colleague at Nexa Law, primarily Alistair Haggerty, with other Nexa litigators where the matter calls for it. They act for you on that and quote their own fee. There’s more about my Nexa colleagues here.

The articles and shareholders’ agreement

Before anyone talks about court, I’ll ask to see the company’s articles of association and any shareholders’ agreement. Between them they usually say who can appoint and remove directors, what needs unanimous consent, what happens when someone wants to sell, whether the others have a right of first refusal, how shares are valued, and whether a leaver can be made to sell. The answer to a dispute is often in one of those clauses, even if nobody has looked at the document since it was signed.

Where there’s no shareholders’ agreement and the articles are the standard ones, you fall back on the Companies Act 2006 and the general law, which gives a majority a good deal of power and a minority fewer protections than people assume.

The usual ways of resolving it

Most of these disputes end with one side buying the other out, so the argument is usually about the price and the terms, and there are three realistic ways of getting there.

The first is a negotiated purchase, where one shareholder buys the other’s shares, with the price either agreed or fixed by an independent accountant. I don’t value businesses, but I can point you to accountants who do. The deal is then documented much like a small company sale, with a share purchase agreement, resignations, and usually restrictions on the leaver competing.

The second is a buyback, where the company itself buys the shares and cancels them. It’s useful where the remaining owners don’t have the cash personally, but the Companies Act rules are strict and a buyback done wrongly is void. I’ve written about how share buybacks work and the red flags.

The third is court. A shareholder can petition under section 994 of the Companies Act 2006 on the ground that the company’s affairs are being conducted in a way that is unfairly prejudicial to their interests. If the court agrees, it can make whatever order it thinks fit, and section 996 specifically includes ordering the purchase of a member’s shares by other members or by the company. So even the litigation route normally ends in a buy-out, at a value the court decides, after a good deal of time and cost. As a last resort the court can wind a company up on the just and equitable ground in section 122 of the Insolvency Act 1986, which is rarely what anyone wants.

Removing a director

Removing someone as a director doesn’t remove them as a shareholder. Shareholders with more than half the votes can remove a director by ordinary resolution under section 168 of the Companies Act 2006, using the special notice procedure, whatever the director’s service contract says. But the director keeps any claim for compensation, may have employment claims, and remains a shareholder afterwards. In a small company run on the understanding that everyone would be involved in management, excluding someone can be the very thing that founds an unfair prejudice petition, so it’s important to take advice before the board meeting.

Partnerships

If the business is a partnership and not a company, the partnership agreement governs. Where there isn’t one, the Partnership Act 1890 fills the gap, and its default rules are often not what the partners expected. Under section 24, partners share equally in capital and profits and contribute equally to losses unless they’ve agreed otherwise, whatever each actually put in. I’ve written about the most important thing to know about partnership disputes. For medical practices there’s a separate page on GP partnership disputes.

What I do and what my colleagues do

I’ll review the articles and shareholders’ agreement, tell you what your options are, and, if there’s a deal to be done, negotiate and document the exit, which means the share sale or buyback, the settlement terms and the changes at Companies House. My fee for that is fixed and agreed in writing once I’ve seen the documents.

If the other side won’t engage, or something urgent is needed (such as stopping assets being moved, getting access to information, or a petition), I’ll introduce you to Alistair or another Nexa litigator and step back, although I’d be glad to pick up the transaction again if it settles.

What to send

• The articles of association and any shareholders’ agreement
• Who holds what shares, and who the directors are
• A short account of what’s happened and what you’d like the outcome to be
• Recent accounts, if you have them

Next steps

Send me the details and I’ll let you know whether it looks like a negotiated exit which I can handle or something for my colleagues.