How to deal with shareholder disputes

  • Be clear what has gone wrong: What is the reason for the breakdown in relations between shareholders? Has there been a misapplication of funds? Has there been a failure to convene meetings or a failure to provide proper information on how the company is being run? 
  • Establish the positions of all concerned: Check how the shareholdings and voting rights are divided.
  • Look at any relevant documents: A shareholder’s agreement usually sets out an exit route for a shareholder and will deal with deadlock situations. Check the company’s articles of association for provisions about the removal of directors and the transfer of shares. 
  • Seek early legal advice but be clear who is instructing the solicitors: Generally, the company should remain passive in any dispute between shareholders. The use of company funds to pay for legal advice will give ammunition to the departing shareholder. The advice received may not be privileged and the company may have to disclose it to the exiting shareholder.
  • Petition the court: The most common remedy is to a petition the court on the basis that the company’s affairs have been conducted in a manner which is unfairly prejudicial to shareholders. The court has a wide discretion as to the relief that it can order. Frequently, an order is made that the other shareholders or the company buy out the shares of the petitioning shareholder.
  • Obtain an early valuation of the outgoing shareholder’s shares: A prompt and fair offer to purchase the shares can defeat an unfair prejudice petition, provided that it also includes an offer to pay costs. An early independent valuation can also form the basis for negotiation leading to an agreed settlement.
  • If you are the aggrieved shareholder, don’t delay: The court can discount the value that it ascribes to your shareholding if you are slow in taking action. If you leave it too long, the court may refuse to grant any relief at all.
  • Don’t overlook that the outgoing shareholder may also be a director and/or an employee: An exiting director/shareholder should not resign his directorship. Unfair prejudice petitions are often founded on a complaint that the petitioner is being excluded from the management of the company. Resigning is a voluntary act and will therefore prevents any argument of deliberate exclusion.
  • Consider other less confrontational ways of resolving your differences: Get all the parties around a table with an independent mediator to assist with reaching a settlement acceptable to all. This will enable the parties to be creative and flexible in the agreement they reach. For example, customers can be divided between shareholders and appropriate restrictive covenants agreed if both parties intend to run competing businesses post split.
  • If you do agree terms of settlement, check whether any company law provisions need to be complied with: If the exiting shareholder was also a director, check whether a compromise agreement is needed to make the terms enforceable.

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Clare MacKay is a solicitor at SA Law.

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