Shareholder Disputes: What to do when disputes arise – Episode 4

In episode four of our Shareholder Disputes podcast series, Corporate Partner Stuart Mullins and Dispute Resolution Associate Jack Hobbs confront the realities of shareholder fallouts and share practical strategies for managing these complex situations.

Building on earlier episodes about dispute prevention, this episode covers:

• Immediate actions to take when a shareholder dispute arises 
• The importance of reviewing shareholder agreements and company documents 
• Key legal remedies, including unfair prejudice petitions and derivative claims 
• How to safeguard business operations during a dispute 
• The role of mediation and setting realistic expectations

Whether you’re a founder, investor, or director, you’ll find essential insights and actionable advice to help you navigate shareholder disputes and protect your company’s future.

For guidance or to discuss any topics from this episode, please contact Stuart Mullins or Jack Hobbs.

Shareholder Disputes Series

• Episode 1: Navigating the Challenges
• Episode 2: Planning for the Worst
• Episode 3: Managing Shareholder Buyouts and Exits
• Episode 4: What to do when disputes arise

Transcript

Stuart Mullins   00:06
Welcome everybody, welcome to another podcast concerning shareholder disputes. This is an additional podcast that we've been asked to put together by audiences to date following on from the three that we delivered with Goringe Accountants. And this is really about, well, what happens if there is indeed a dispute? So the last three podcasts, if you've had a chance to review them, are all around trying to avoid a shareholder dispute. But unfortunately, in certain instances, it really is unavoidable and we've been asked to put together a brief overview of some practical tips and key considerations when and if founders or indeed shareholders fall out. And to this end, 

I, Stuart Mullins, is a partner in our corporate team and joined by my colleague Jack Hobbs. Jack is an associate in the dispute resolution team who has vast experience of
 of dealing with shareholder relationships when they break down. Welcome, welcome, Jack, and thank you for joining us. 

Jack Hobbs   01:27

Happy to be here, Stuart 

Stuart Mullins   01:28

So I guess, Jack, despite things like shareholders agreements, considering mediation, giving all the things we talked about in the previous podcasts, sometimes it is unavoidable. And I guess, you know, we have to think about shareholder disputes in the widest sense, i.e. not just, you know, those shareholders who have worked together for a long time suddenly falling out with each other, although that does happen, albeit uncommonly. But there are quite a spectrum of instances. So, for example, investors not being happy with the way in which a management team is running a company being invested in it, shareholders leaving the company, and those shares moving into perhaps other generations of family members and expectations and cultures clashing at that stage. I guess, Jack, what we need to talk about really, what do you think are the key things that, and immediate things that shareholders should do if they feel that, yeah, this relationship has indeed broken down?

Jack Hobbs   02:50

Well, the easy answer to that one, Stuart, is to take your legal advice as early as possible. With all types of disputes, the longer things go before parties are properly advised, the worse they get. And shareholder disputes are simply no exception. But apart from the easiest answer, I always say to know your documents.
 
You spoke in the first three podcasts in this series about putting in place shareholders agreements and they can materially affect the options that are available when a dispute does unfortunately emerge. The key documents will be the articles of association and the shareholders agreement. And as you and Nicky spoke about, shareholders agreements can be extremely bespoke. So if you're working on the assumption that there is no shareholders agreement in place, but it actually turns out later on that there is one in place, you end up going down a path that is totally incorrect and doesn't help you to resolve that dispute at the earliest opportunity. 

Stuart Mullins   03:49

And I think that's important, isn't it?  Because Under the Companies Act, the model articles, which 99% of companies out there still adopt, do not contain any form of dispute resolution or mediation process. And it's worth just making the point that shareholder agreements are not implied. They do need to be express, which is a legal way of saying that unless you have put together a shareholders agreement with your shareholders, one will not exist.

Jack Hobbs   04:22

Absolutely, absolutely. We quite often see that where shareholders come into a business later on in the life of the company and they weren't a party themselves to the original shareholders agreement and have come in by way of a deed of adherence or something similar, that they often have never actually spent much time reading the shareholders agreement that is in place and it's new to them as well. So it can quite often be the case  that they don't know what it says and they don't know that it exists. They just signed a deed of adherence on day one and never, never bothered to look at it. 

Stuart Mullins   04:54

This is very true and something that we did come across. So where a dispute emerges, Jack, where's the, where's the Clear, clear areas of danger from that point. What's the what's the what do we have to be mindful of as a effectively a quasi partner, as shareholders are often referred to in borrowing companies? What do we need to be really? conscious of on day one? 

Jack Hobbs   05:23

For me, it's protecting the business at all costs. The business itself is literally the value that the parties are arguing over. So it can be very, very easy to take the eye off the day-to-day that's involved in running the company whilst A shareholders dispute is ongoing in the background.

Customer relationships, business operations, public perception can all fluctuate during a dispute. And it can be very, very easy for shareholders that are arguing amongst themselves to turn a blind eye to these matters and get three months down the line and realise that the business isn't in the position it was three months ago.
 

Stuart Mullins   06:04

And of course, it's mindful of pointing out that there are statutory duties on quite often shareholders who are also directors of the company. They have two hats. They have their shareholder entitlement to profit hat, but they also wear a hat as officers and key governance officials within the company. And those two roles promote two different duties or two different lists of duties are required of them. And one of the things that you have to do as a director is put the interests of others, the stakeholders, which is not necessarily limited to just employees, above your own personal interest. So it very much is incumbent upon those shareholders that are in dispute, who are also directors, to really take that advice and be mindful of what the law requires of them with their directorship hats on. 

Jack Hobbs   07:01

Yeah, absolutely. Just because you're unhappy with a fellow shareholder doesn't mean you can start running the business in a way that doesn't promote the success of the company and is not in the company's best interests. So yeah, it's important to remember that, you know, you don't wear both hats at all times. You do have to continue to manage the company correctly.  And the other point I'd say as well is to know your objectives at the outset. It's very uncommon once a dispute has come over to us in litigation for it to be smoothed over and everything going back to the way it was on before it came before it came across my desk and understanding where you want to end up at the end of the process is very, very important to know early on. I mean, in a dispute, are you looking to ultimately take control of the company? Are you looking to exit the company and go on a new venture? I mean, a lot of those considerations will be born out of the nature of the dispute itself.

But in terms of tailoring a, you know, an action plan to a specific dispute, knowing your end goal can be very, very important.

Stuart Mullins   08:14

Thank you, thank you, Jack. And that sort of leads on really to, well, okay, we've fallen out, we've tried to sit around over a coffee and we've tried to put emotion out of things. We've tried to decide how we're going to move on as shareholders. We can't reach that agreement. The relationship is lost. We have no choice, with all due respect, but to come and see you. And we instruct you. What are you likely to tell a shareholder in that situation that their ultimate recourse or options to resolution are? 

Jack Hobbs   05:55

So it will vary depending on every shareholder dispute, but the typical claims that are born out of shareholder disputes will include unfair prejudice petitions, so a section 994 petition, which allows shareholders to seek relief from the court where a company's affairs are conducted in a manner that's unfairly prejudicial to their interests. In my experience, these seem to be becoming increasingly common, particularly in the last couple of years. And whenever you're thinking, you know, unfair prejudice petition, the general remedy is to buy out a shareholder's shares at fair value. So, I mean, it's very, very good at focusing the mind early on because it promotes a conversation as to what can be done when there's a known likely remedy at the end of the day. Probably the second most common one to come out of shareholder disputes would be derivative claims, which is slightly different. This is where a shareholder effectively steps into the shoes of the company and brings a claim in the name of a company for wrongs done to the company. So it might be that a director shareholder is preventing a deadlocked company from bringing proceedings against themselves. Derivative claims have a very strict procedure, which is monitored closely by the courts. It can be quite an expensive process, but ultimately, depending on the nature of the dispute, it could be something that's unavoidable and has to be pursued.

I know you spoke about in, I think it was your second podcast of the series with Nicky, about just and equitable winding ups. They do happen. They, in my opinion, a last resort, all the goodwill in the business is lost and usually there's limited realisable value. However, in some situations, it can be exactly what a company needs. It needs to be put out of its misery and, you know, closure for individuals can be a valuable commodity at the end of a bitter of shareholder dispute. So they do have their place, even though they're not used as often as some of the other options to resolution. And then taking a slight look in a different direction, you know, away from the claims that you could be issuing towards, you know, what we could be doing to reconcile matters without recourse of the courts. And, you know, usually when it comes to my desk in the dispute resolution team, there will already have been some sort of settlement discussions that have that have gone on sort of day one. But mediation and continued settlement discussions don't have to cease just because they weren't successful on their first go. But ultimately, the settlement discussions or mediation, the success will depend on the willingness of the parties. Some people, particularly in bitter shareholder disputes, just cannot be in the same room with each other. And the key there, takeaway there is that, you know, you don't need to mediate immediately. Sometimes it is better to let the dust settle and let people call off before putting them in a room together and trying to thrash out an agreement. 

Stuart Mullins   11:58

I think that's a very good point. Certainly my experience with them is that there is a rollercoaster in motion. People do feel betrayed, they go through anger, they feel disappointed, and then naturally they're worried about their position, the position of the company. And that can cloud judgement. So therefore, I think what you're saying is absolutely right, before you do go through that mediation or discussion route.
 I think it's worth really looking to see if you can structure a meaningful conversation about what the future ownership of the business looks like. Because I think if you are in a position to have that discussion early on.

It can save a great deal of expense. going forward and time in court. 

Jack Hobbs   13:01

Yeah, absolutely. And in terms of progressing those meetings as efficiently as possible, there will always be things that shareholders in the midst of these disputes just don't see eye to eye on. And, you know, there's no point talking about them.
 But any matters that you can, you know, agree that you know would underpin any sort of settlement or moving forward in the business could be quite important. So, for example, if one shareholder thought the business was worth 5 pounds and the other thought the business was worth 5 million pounds, you're very unlikely to do a to do a settlement. 

Stuart Mullins   13:35

In my experience, Jack, everyone thinks it's 5 million when they're selling and everyone thinks it's 5 pounds. when they buy it. But yeah, your point's a good one. When you're talking about private limited companies, ultimately something is only worth what someone's prepared to pay for it. There is so much elasticity around fair value and independent valuation. I'm ready to talk about that any further. We kind of need Nicky and Nicky's expertise here, but your but your points very well made, very well made indeed. Jack, any parting comments before we wrap up today?

Jack Hobbs   14:13

Only to say that for anyone that does get involved in a shareholder dispute or someone comes to you with one is that they call a shareholder dispute a corporate divorce for a reason, because as we said, it's an emotional rollercoaster. Everyone feels like they're the first person going through it. And quite often it can be a much more difficult litigation process to manage than your standard corporate litigation, because everyone has deeply rooted beliefs and feelings. And you know, the key takeaway would be, you know, you're never going to be the first person to go through this. It is difficult, but more often than not, resolutions can be found. and where resolutions can't be found, the court has means to be able to intervene.

Stuart Mullins   15:00

Jack, that's brilliant. Thank you so much for your time today and your words of wisdom. And to our audience, thank you, thank you very much for taking the time to listen. We do hope you found this useful. And if you'd like to listen to some of the earlier podcasts on this subject or on the wide range of matters that we talk about, do please visit our website and feel free to have a listen and also review the articles that we put together on a number of subjects that we consider might be of interest to the wider business community. That only leaves me to say thanks again for listening, and we do hope you enjoy them. Until our next one, we wish you well and enjoy the forthcoming Easter break. Bye for now.