1. Deadlock and stalemate disputes
Deadlock happens when equal shareholders cannot agree on key decisions, paralysing business operations. Disputes can arise in relation to major decisions, such as whether to pursue expansion, hire key personnel, approve significant expenditure, or sell the business. Without a controlling shareholder, day-to-day operations grind to a halt as neither party can force through their preferred strategy. In 50:50 joint ventures, neither party commands the 75% majority required for special resolutions, creating gridlock that can destroy company value.
Possible resolution mechanisms
Shareholders agreements often anticipate deadlock and provide contractual mechanisms to break the impasse.
- Casting vote provisions grant the chairman a pre-determined casting vote in tied decisions.
- Independent arbitration allows the shareholders to appoint a neutral expert to resolve specific disputes.
- Russian Roulette clauses enable one shareholder to offer to purchase the other’s shares at a set price, with the receiving shareholder able to reverse the transaction and buy the offering shareholder’s stake at the same per-share price, ensuring the offer is fair.
- Texas Shootout involves sealed bids from both shareholders, with the highest bidder acquiring the company at that price.
Where no contractual mechanism exists or both parties reject settlement, shareholders can petition for just and equitable winding up under section 122(1)(g) Insolvency Act 1986. The courts will dissolve a solvent company with deadlocked ownership, allowing an independent liquidator to distribute proceeds according to shareholding. However, courts treat winding up as a last resort and will refuse the petition if alternative remedies exist or the petitioner has acted unreasonably. Additionally, the petitioner must have held shares for at least 18 months.
2. Breaches of shareholder agreement disputes
Shareholders agreements set out the ground rules for how shares can be transferred, how voting decisions are made, and what happens when a shareholder wants to exit. Breaches typically involve selling shares without offering them to existing shareholders first, voting against agreed terms, or ignoring agreed exit procedures.
Pre-emption rights require that shares be first offered to existing shareholders before any external sale. Breach occurs when a shareholder attempts to sell to a competitor or outsider without following this procedure. Voting covenant violations arise when a shareholder votes against agreed reserved matters, such as major capital expenditures or changes to the business plan. Exit procedure failures occur when shareholders attempt to exit without following contractually-mandated timelines or negotiation steps.
Possible resolution mechanisms
- Damages – i.e. monetary compensation for quantifiable losses
- Injunctions – preventing threatened breaches or compelling specific performance
- Forced share transfer – if the breach has the potential to destroy the working relationship
- Without prejudice negotiations – settlement discussions to avoid litigation costs
It is important to bear in mind that pre-action protocols require parties to exchange letters of claim, documents, and consider mediation before starting court proceedings.
Share valuation disputes
When shareholders cannot agree on what their shares are worth, disputes can quickly become expensive and adversarial. The disagreement often centres on which valuation method should apply and whether the shares should be discounted because they represent a minority stake.
The courts recognise several valuation approaches depending on the company’s circumstances. Discounted cash flow (DCF) values a business based on its projected future earnings, making it suitable for profitable companies with steady cash flows. EBITDA multiples compare the company to similar businesses that have recently sold or are publicly traded. Net asset valuation simply adds up what the company owns minus what it owes, which works best for property-holding or investment companies. Fair market value represents what a willing buyer would pay a willing seller in an arm’s-length transaction.
Resolving valuation disputes
In recent years, we have observed that parties are increasingly opting for expert determination rather than court battles. An independent accountant or valuer examines the company’s finances and provides a binding valuation, usually within weeks rather than months or years. This approach saves substantial legal costs and maintains greater confidentiality than public court proceedings. Courts increasingly favour expert determination over adversarial expert evidence as it provides faster, more cost-effective resolution.
Director misconduct disputes
Directors owe several statutory duties under the Companies Act 2006, including the fundamental obligation to promote the success of the company. When directors breach these duties, shareholders often seek remedies ranging from removal to financial compensation. Misconduct takes many forms:
- Misuse of company assets occurs when directors divert business opportunities or funds to personal benefit, such as self-dealing transactions or competing ventures.
- Breach of fiduciary duties happens when directors act in conflicts of interest without proper disclosure to the board or shareholders.
- Fraudulent or wrongful trading involves continuing to trade the company while insolvent or with intent to defraud creditors, a particularly serious breach.
- Poor governance includes failure to exercise reasonable care, diligence, and skill in decision-making.
Possible resolution mechanisms
Shareholders have multiple options for addressing director misconduct. The simplest and most direct is removal by ordinary resolution (51% vote) under section 168 Companies Act 2006. This requires no court involvement, a shareholder resolution at a general meeting can remove a director immediately, though the director is entitled to speak in their own defence.
Beyond removal, shareholders can pursue damages claims, recovering losses suffered by the company or individual shareholders. These claims require proof of the breach and quantifiable loss, making them more complex than removal votes. Injunctions prevent directors from continuing wrongful conduct, such as misusing company assets or pursuing competing business ventures. For more serious breaches affecting the company as a whole, shareholders can also bring derivative claims on behalf of the company to recover losses.
Final Words
Shareholder disputes rarely resolve quickly or cheaply. The sooner you seek legal advice when warning signs emerge such as unresolved disagreements, breaches of agreement, or unexplained director conduct, the better the outcome is likely to be. Most disputes that reach commercial litigation could have been settled at a fraction of the cost through early negotiation or mediation. If litigation becomes unavoidable, understanding which remedy applies to your circumstances allows you to pursue the most efficient resolution. Well-drafted shareholders agreements with clear deadlock provisions, pre-emption rights, and exit mechanisms prevent many disputes from arising in the first place.
FAQs
What is the cheapest way to resolve a shareholder dispute?
Early negotiation and mediation is almost always the cheapest and fastest way to resolve a shareholder dispute. Pre-action protocols require ADR consideration anyway. For valuation disputes, an independent expert can provide a binding decision in weeks rather than months of court cases.
Can I force a director out without going to court?
Yes, you can remove a director by ordinary resolution (51% shareholder vote) at a general meeting under section 168 Companies Act 2006. This requires no court involvement, though the director is entitled to speak in their own defence before the vote.
What happens if I breach a shareholders agreement?
The other party can seek damages for losses, obtain court injunctions forcing compliance, or pursue forced share transfer if the breach is serious enough. Courts enforce shareholders agreements as binding contracts. You will also be required to engage in pre-action mediation, and failure to do so results in cost sanctions against you in any subsequent litigation.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
This article does not constitute legal advice. For further information, please contact our London office.
Share this Post