In last month’s issue of Fashion Focus we considered some consensual ways of resolving disputes between shareholders here. In many instances, these methods will lead to the right result.
But if they should fail to do so, the disputing shareholders will need to consider non-consensual ways of resolving the dispute. Non-consensual ways of resolving disputes by their very nature will present more legal challenges and parties should seek legal and tax advice as soon as they can to place themselves in the best position possible. So what are the options?
Applying pressure on the leaver to sell
Assuming the leaving shareholder has resigned as a director of the company, the remaining shareholder could apply pressure on the leaver to sell his/her shares, for example, by:
- increasing his/her own salary; or
- awarding himself/herself a bonus to reflect the increased work he/she has taken on; or
Unfair prejudice and purchase orders
Either shareholder may be able to bring a petition under section 994 of the Companies Act 2006, by showing that the other shareholder is at fault by acting in an unfairly prejudicial manner. If a court agrees, it is likely that they will order a valuation of the company, to be carried out by an independent valuer, and a follow-on purchase order where the company / other shareholders will be required to purchase the shares of the applicant.
Compulsory winding up
The parties may decide that their only option is to discontinue the business and wind up the company. The company or a shareholder(s) may petition the Court for the winding up of a company on the grounds that it would be just and equitable to do so. The Court’s decision is, however, discretionary.
Sale of assets
The remaining shareholder could sell the company’s assets to a third-party company or a newly incorporated company. Once the assets have been transferred to the third party or newly incorporated company, the leaver will own shares in an empty shell company.
It may be possible to place the company into administration and then immediately sell the company’s business under a sale to a third party company or newly incorporated company, which would be arranged before the administrator is appointed.
Changing the status quo by taking any of these options is likely to involve greater costs and be more time consuming than a consensual approach. It follows that a consensual approach to ending a shareholders’ dispute is to be recommended whenever possible.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.