We have seen a surge in the number of enquiries to help out with breaking the deadlock when a shareholder dispute paralyses a company.. Our corporate team will try and ascertain whether there’s a commercial deal to be negotiated (typically with one shareholder being bought out). If this doesn’t prove possible, our dispute resolution team is on standby if the situation gets litigious.

Set out below are ten common themes/lessons learnt from recent work in this area.

1. “In life, problems are solutions waiting for answers”

A very old cliché but often very true. In a couple of transactions this year, there were problematic obstacles which could have prevented a potential exit strategy. For example:

  1. in one case, it was necessary to appoint additional directors to a board of the limited company and there was a distinct lack of volunteers. The way through this was to appoint corporate directors; and
  2. in another, there was a concern about whether transferring assets out of the deadlocked company could be subsequently attacked as a transaction at undervalue. After reviewing the assets of the company it was soon apparent that a transfer of the assets was not actually needed as key customers/suppliers were more than happy to enter into new contracts with a newco rather than having their existing contracts transferred over.

2. Big Characters= Big Challenges

People often get very entrenched in shareholder disputes. Typical examples of these are when directors fall out with other directors or when shareholders no longer trust the board. Often the chief protagonists were friends, as well as business colleagues before, so the breakdown of the relationship impacts on several levels. “Each story has two sides” and “principles are expensive things” are also truisms very relevant in shareholder disputes. Even if a client has a very strong legal position, it is often a case of being pragmatic and looking for common ground. Sometimes even an apology will go a very long way to solving a dispute.

3. Carrot and Stick

Often a party can be wearing three hats (employee, shareholder and director). With a bit of creative thinking, an unhappy shareholder can be encouraged towards a settlement if pressure is applied in the right areas. A bunch of carrots could include:

  • a favourable tax rate (if entrepreneurs relief applies, tax should only be charged at 10% on a share sale);
  • a possible tax free payment of £30,000 in compensation for loss of office;
  • a relaxation of restrictive covenants/non-compete obligations; and
  • an agreed reference and press release.

The sticks are often the reverse of the above with, for example, the threat of removal as a director/employee putting at risk entrepreneurs relief. If the company is in financial difficulties, the threat of bringing in an administrator often has a galvanising impact. Time limiting or otherwise reducing the offer can sometimes also be an effective tactic. 

4. Mediation but get the right mediator

There is often a dispute resolution clause in a shareholder’s agreement requiring the parties to sit down to try and thrash out a resolution. Often there is an additional obligation to appoint a mediator to assist with the process. Mediators can work wonders in bringing parties together who were polar opposites at the start of the mediation. On the flip side, we have seen mediators add no discernible value and waste valuable time struggling to understand entrenched positions. It is important that the professional advisers identify the right mediator for the particular set of circumstances.

5. Use trusted intermediaries

On a couple of recent cases, the deadlock had become so toxic that there was no ability to negotiate directly between the parties. In such circumstances, it can be effective for each side to appoint a trusted intermediary who are fully briefed and have a mandate to negotiate an exit without all the emotional baggage.

6. Read the small print

Shareholder disputes occur, more often than not, when the parties have not spent the time to negotiate a shareholders agreement or bespoke articles. However, we have seen several disputes occur when such documents have been previously put in place. If so, it is important that all the parties review the wording and understand key provisions such as what consents are required to remove a director; deadlock resolution clauses; what are the quorum provisions for shareholder and director meetings; has the chairman got a casting vote etc.

7. Legal costs can take centre stage

Parties who have been previously arguing over the commercial running of the company, can suddenly find another agenda added to their settlement discussions:- who pays legal costs (particularly if particulars of claim have been filed). Costs can escalate rapidly and there are often legal considerations involved if the deadlocked company is asked to pay the same. Parties should take care that the legal costs do not overtake the value of any potential settlement. Settlement at an early stage obviously reduces this exposure. 

8. Check the articles/insurance policy

Sometimes the dispute in question can arise as a result of the actions of a director (as opposed to actions taken by an employee or by a shareholder pursuant to his/her rights under a shareholders agreement). Often towards the back of articles of association, there are indemnity provisions allowing the director to be indemnified by the company for his/her action. It may also be that the company has taken out a D&O insurance protection and a costs contribution is available under that policy.

9. Future proof your actions

We have observed situations where directors will commit to writing proposals that arguably are not in the best interests of their company’s creditors or other shareholders. Often there is a misunderstanding that because communication is with the company’s lawyers, such emails will be deemed privileged and not be disclosed. This is not always the case. For example, if the company subsequently goes into insolvency, its appointed administrator/liquidator could legitimately request access to such emails as they are standing in the shoes of the company. Even if a proposal was not implemented, it could provide ammunition if the official is looking at the actions of the board in a wrongful trading or breach of duty case.

10. Find a way to settle

In post mortems after a deadlock has been settled, clients often express the wish that they had found a way to settle the case at an earlier stage. In our experience, getting the parties together (even if it does involve at first separate conference rooms), is always key. Having creative and proactive professional advisers looking to identify middle ground is also essential.


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