Shareholder Disputes: Navigating the Challenges – Episode 1

Welcome to the first episode of our podcast series delving into the complex world of shareholder disputes. Hosted by Stuart Mullins, Corporate Partner at Clarkslegal, and joined by Nicky Goringe Larkin, founder of Goringe Accountants, this episode covers:

• Why shareholder disputes happen
• How to recognise early warning signs
• Practical tips for mitigation

Gain insights from experienced advisors as they discuss how to avoid disputes, manage risks, and address potential outcomes—including share transfers and recovery strategies.

Whether you’re a business owner or shareholder, this series provides essential guidance to help you navigate challenging situations and protect your interests.

If you’d like to discuss any of the topics from this episode, please contact Stuart Mullins or Nicky Larkin, who would be delighted to assist you.

Transcript

Stuart Mullins   00:06

Welcome everybody. Welcome to the first in a series of podcasts, where we are going to talk around shareholder disputes. When they may arise. The sorts of things that you should do in our experiences to try and mitigate, and where ultimately they could lead. Some tips from us as to how we avoid them. And then also to look at options of recovery really, which ultimately will be the or could be a transfer of shares. 
 
So my name is Stuart Mullins. I'm a corporate partner at Clarkslegal. I'm joined today by Nicky Larkin, the founder of Goringe Accountants and Business Advisory.

Hi, Nicky, thanks for joining us today.

Nicky Larkin   00:58

Hi, good to see you again, Stuart.

Stuart Mullins   01:01

Yeah, likewise. Shareholder disputes, Nicky. Sadly, they do arise and as trusted advisors, we often get pulled into them. You probably more so than lawyers in the initial stages as a point of first contact, I'd suggest.

Nicky Larkin   01:21

Absolutely. So yeah, we unfortunately we do come across these fairly regularly that where they have shareholders disputes. It may be about one specific item or it could be so much so that the whole firm is at risk.

So the typical reasons that this may come into play is it could be divorce, there could be death, there could be, it might not be a full on dispute because it could be something just from retirement.

Stuart Mullins   01:58

Yes. I think that's a very important point to make is that we're not, when we talk about a shareholder dispute in one's mind, it conjures up an issue of founders falling out between themselves. And yeah, and I'm finding it difficult to agree. Now that typically it's a series of events that will lead to that.

Nicky Larkin   02:07

Yeah. Their fisticuffs.

Stuart Mullins   02:16

Disgruntlement, for want of a better phrase. And that can result in business pressures, a simple difference in opinion that can manifest itself over a period of time. And people see themselves ultimately thinking that the business should go in separate and non-collegiate ways.

As you say, the unexpected passing or critical illness of a member, whilst they're not normally grounds for dispute, it can lead to some difficult conversations around what should happen to that individual's shareholding. And similarly, where there's separation in one's personal life, that can give rise to third-party claims over shareholding and shareholding value and that in itself can lead to issues around which question the future of where those shares have held. So I suppose in many respects what we're looking at here are. Rather than disputes as such, I suppose we're really talking about sort of matters that give rise to issues which trigger a need to exit a shareholder or result in a divergence of founder interest, Nicky.

Nicky Larkin   3:38

Yeah, absolutely. So sometimes it will be literally somebody wants to leave, but they then have to all come to an agreement how that is going to happen. Other times it could be the one side wants the other to leave, or even at both at the same time, and you know, you're trying to resolve. What that's going, what will happen to that. 

Another regular thing that I see is where one shareholder thinks that, oh, shareholder stroke director, because usually still this one and same thing often in these SMEs, that one may think, yes, we're ready to exit. So they want to sell the business, but the others saying, no, actually, you know, there's still more gold to mine before we get to that point. So there's all sorts of different things that they can fall out about. It could be the marketing direction, it could be diversification. So what we're trying to do, as an accountancy firm, what we try to do usually is get to the nub of what the actual issue is, see if it can be resolved in-house, and if not, if there has to be some sort of remedy, working out what the possible ways it can be, you know.

Stuart Mullins   04:57

I think that's right. I think because the starting point is that shares are property like you watch, like you cash at the bank, and the Companies Act in and of itself doesn't contain any statutory roots. Or assistance that can trigger a transfer of shares in the event of circumstances arising. So the starting point is that, without any contractual provisions, such as in a shareholders' agreement or in articles in certain circumstances, dragging tag rights, for example, that without those express rights, there is no requirement for individuals to have to offer up the shares, even if they cease to be a director in the company. 

So quite often we're looking at a sort of entrenched position and as you say, Nicky, and I've interrupted you, I'll pass back to you in a second. The first step must be to try and reach some sort of roundtable discussion where you're refereeing, for want of a better phrase, in the interest of the business, as to how the matter can be resolved.

Nicky Larkin   06:39

Absolutely, because, you know, obviously, I always remind them as directors, their first duty is towards the company. So they've got to do the thing that is best for that company. And in some instances, it may be that they still need to work together. But, you know, professionally, they don't have to be best friends, but still, be able to work together. Or if it is going to be a parting of ways, then we, you know, can look at the different ways, which I believe we'll be covering probably in a lot more detail in our next podcast.

Stuart Mullins   07:14

Sorry, Nicky. Yes, I think that's right. I think that, as you say, that the initial steps really are to are to try and have a have a discussion and, as I say, given the various reasons that can give rise to a transfer.

Is it in the interests of the business to sell, for example, if you've got one founder that doesn't believe that that's the right price or that's the right buyer? Oh, there are things like dragging tag rights in the agreement. Can you sit round and overcome some of those issues? Certainly. Instances around people passing, people becoming critically ill. There are clear contractual routes that you can put into shareholders' agreements, and you can insure against those risks, which can give some comfort. And also some value for the estate of the poorly or shareholder that's passed.

Nicky Larkin   08:02

And, also one other thing, so, you know, we've talked about could be that one or the other ends up taking it over, but the, or, you know, it might be a full exit in the end for everybody. But the other one that we haven't talked about, which is just as good a remedy in some circumstances, is potentially demerging the business, if there are distinct areas within the business that the different shareholders would like to have control of, that's another possibility to consider.

Stuart Mullins   08:57

Yeah, that's absolutely right. You know, having that conversation right in the early stages and saying, look, is there an alternative to the nuclear option, which would ultimately be a just and equitable winding up in the High Court, which nobody really wants to do, A, because it costs a lot of money and B, it takes a lot of time. C, it involves your business relationship being disclosed openly in court. So, I think that's, I think, as you say, looking at whether there can be some sort of restructure, a demerger, perhaps some sort of buyback. And we'll look to explore some of these in a bit more detail later on in the series of podcasts. But as I say, we wanted to set the scene, I think, with the first one and make the point that, well, yes, critical illness, death, divorce are some of the instances that can trigger discussions around the compulsory transfer of shares. And the need to consider exits, but that there are others. 

We hope that by listening to this series of podcasts, you'll have some practical tips to help should it be an issue for you. But as we'll see in our next episode, there is a general solution to certain instances which can give rise to these issues, and we will talk about the concept of shareholder agreements in our next podcast.

So, I think currently that sort of leads us to a natural conclusion. And Nicky, thank you for joining us today. And thank you everyone for listening. And we look forward to welcoming you to our next podcast in due course, which is entitled ‘What to do when you have a shareholder dispute? Where could they lead? And as I say, we're hopefully going to talk about some practical solutions that can ease those initial conversations and instances, a bit like an insurance policy, I suppose, that is a shareholder's agreement.

Bye for now.

Nicky Larkin   11:12

Bye.