Shareholder disputes are often complex. They concern a technical area of the law. Courts often tell parties without legal representation to seek advice before the matter proceeds further and we have often seen cases adjourned on that basis. It is therefore important to seek cases early on and before costs escalate.
Shareholder disputes also revolve around facts and circumstances that are specific to that case. As such, cases can often be won or lost depending on the tactical decisions that can are made.
We have a longstanding expertise in this area; we like to be a step ahead of our opponents when it comes to tactics and we always work with our clients to find a solution.
Partnerships disputes are often emotive. Reputations and careers are on the line and until a solution can be found, the business in question may be at stake. We therefore understand that it is important to work quickly and effectively with our clients to find a way forward depending on the partnership dynamics in question and the individual partners in dispute.
If a dispute arises, we initially consider the partnership agreement between the parties because it should explain the rights and responsibilities between the partners. However where there is no partnership agreement, we will consider the Partnership Act 1890 to determine those rights between the parties.
However in any partnership, there is an overriding duty on the partners to act in the utmost good faith to one another and to the partnership as a whole. We therefore work closely with our clients to consider these important factors and to find an effective resolution to the dispute through negotiation, mediation and/or any other form of Alternative Dispute Resolution. However where that is not possible, we have the “street fighter” instinct to do battle and to achieve the best results for our clients.
If you see the possibility of a dispute in your partnership, contact us for confidential advice before war breaks out. You should also review the terms of your partnership agreement, if any, in any event to make sure that it is up to date and meets the requirements of the partnership.
A derivative claim is a claim that is brought by a shareholder in the name of the company against a director of the company for negligence, breach of duty, default and/or breach of trust. The claim must be for the company’s benefit and not for the benefit of any individual shareholder.
A shareholder must seek the court’s permission before being allowed to continue the derivative claim. In deciding whether to grant its permission, the court will consider (i) whether the shareholder is acting in good faith in seeking to bring the claim against the company; (ii) the importance that a person acting in accordance with the duty to promote the success of the company would attach to that claim; (iii) whether the company had decided not to pursue the claim; (iv) whether the shareholder could pursue an action in his own right and/or (v) whether the company would authorise or ratify the claim.
If the court grants permission, then the matter will proceed to a final hearing. The company may be ordered to indemnify the shareholder in respect of the costs he has incurred in seeking permission. However if permission is not granted, the court may order the shareholder to bear the costs of seeking permission. It is therefore questionable whether a shareholder will wish to expose himself to this type of risk especially as the benefit of any successful action will go the company and not to the shareholder. However these types of claims are likely to be beneficial in certain circumstances and a shareholder who wishes to pursue a derivative claim or indeed a director that is faced with a derivative action should seek advice early on to receive maximum benefit.
These types of claims are particularly common in small limited companies where the business was initially founded as a quasi-partnership but has grown significantly. The shareholders are often directors and they have invested their time, effort and money into the company from the outset. Consequently, there is an understanding that the directors would participate in the business as shareholders and on equal terms. However, founding relationships are sometimes forgotten and a shareholder may be left feeling that the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to him.
The most common forms of unfairly prejudicial conduct are a mismanagement of the company’s affairs; a failure to pay dividends; an improper allotment of shares; a failure to convene and hold general meetings; a repeated failure to file accounts on time and a misappropriation of company business or assets. However this is by no means a comprehensive list.
In issuing a petition, a minority shareholder will need to demonstrate that the acts or omissions of the majority shareholder(s) relate to the company’s business affairs; the conduct of those affairs has prejudiced the minority shareholder’s interests and the prejudice is unfair. The minority shareholder will also only need to establish one allegation in order to succeed in his/her claim.
The first step in any assessment of unfair prejudice is to examine whether a shareholder’s contractual rights have been infringed by reviewing the terms of the shareholder’s agreement. However not every member will have a shareholder’s agreement. We will therefore consider the articles of association, the memorandum of association and/or the franchise agreement to ascertain whether there has been a breach. We will also work with you to establish the facts so that an overall assessment can be made of whether there has been unfair prejudicial conduct.
Just & Equitable Winding Up
Section 122 of the Insolvency Act 1986 provides a more drastic solution for a shareholder who complains of unfair conduct by a fellow shareholder. On a successful petition, the court will order that the company will be wound up on the grounds that it is just and equitable to do so. The company will then cease to trade and a liquidator will be appointed to collect in the company’s assets, pay off the creditors and distribute any surplus funds the shareholders. However whether a shareholder will receive any funds will depend on the number of creditors and the value of their claims.
What is “just and equitable” will depend on the facts of the case and this is to be determined by the court. The scope of the just and equitable test is wide but the court will consider whether or not it is reasonable for shareholders who do not want to stay in the company to be released.
However, the court will only order a winding up if there is no other remedy available to the petitioning shareholder. Therefore, for example, an offer by a shareholder to purchase another shareholder’s shares for a reasonable sum may amount to an alternative remedy. In such a case, the court may not order a winding up.
We have the expertise to assess whether a petition for winding up should be made and whether tactically this should be made alongside an unfair prejudice petition.
Early advice should be obtained especially as the threat of a just and equitable winding up might, in certain circumstances, achieve the right outcome.
Sometimes the partners in a business may feel it necessary to expel a particular partner. However there must be an express provision in the partnership agreement providing for expulsion before a partner can be expelled. Otherwise, the business will need to be dissolved.
A partnership must be careful before taking steps to expel a partner because each and every partner has an overriding duty to act in good faith. A court will not allow a partner to be expelled if they can show their partners acted in bad faith even if the expulsion clause justifies that expulsion. It is therefore essential that any power to expel a partner is for the benefit of the partnership as a whole and not for an ulterior motive. The partner is question should be given notice of the expulsion and should be given a chance to make representations. The remaining partners must however ensure that this process is undertaken fairly and is not part of a predetermined plan to expel that partner.
There are many pitfalls in expelling a partner and it essential to get it right. Legal advice should therefore be sought at the first opportunity and regardless of whether you are a remaining or departing partner.
Dissolution usually takes two forms (i) technical and (ii) general. A technical dissolution occurs when there is a change in the partnership composition. A general dissolution occurs when the partnership ends and the partnership business is wound up.
The partnership agreement will normally provide how a partnership should be dissolved. However, when there is no partnership agreement or where the agreement is inadequate, court action may be required unless the partners can find an acceptable way forward. However this is easier said that done because it depends on the disputing partners being able to co-operate with each in order to achieve an orderly dissolution.
During dissolution, the partnership business is wound up. Partnership assets are liquidated and distributed. Each of the partners would be entitled to a share of the net assets of the business. However usually one or more of the partners wish to continue with the business because it is profitable. In that case, an early settlement with any partner who wishes to leave is essential.
There are other factors that need to be considered during dissolution. For example, who should manage the business pending winding-up; whether an order should be made to the court precluding a particular partner from interfering in the management in the business; how the final accounts should be prepared; how the partnership assets should be distributed and so on. We have experience of guiding remaining and departing partners through this minefield of issues.