Protecting against shareholder disputes

As corporate lawyers, in conversation and when writing articles, we tend to focus on the deals which we have done in positive circumstances - the latest private equity backed MBO, or significant trade acquisition in which we had been involved. However, another (often more challenging) aspect of our practice is doing deals which have originated in a falling out between shareholders. Sadly, these tend often to be quite bitter in nature, and are only agreed upon when it finally dawns on the parties that litigation can be extremely costly and uncertain.

So, how do these shareholder disputes tend to arise, and what's the best way to protect yourself and your business against the expense, emotion and disruption that they invariably cause

Why do shareholder disputes happen?

Why put a Shareholders' Agreement in place?

Key provisions to consider putting into a Shareholders' Agreement Deadlock resolution - these provisions generally work by one party first notifying the other that a dispute has arisen. Once that formal notification has been issued there is normally a "standstill period" for the shareholders to have one final go at discussing resolving their differences. At the end of the standstill period (if no resolution has been forthcoming), either shareholder may make an offer to purchase the other's shares (on a "quickest to the draw" basis). That offer is binding and cannot be withdrawn. The other shareholder may either: (i) accept the offer and sell their shares at the agreed price; or (ii) require the shareholder who made the initial offer to sell their shares at the initial offer price. In either circumstance, if there is a genuine shareholder dispute, this provides a method of quickly and cleanly removing a shareholder without the need for months of negotiation.

Good Leaver/Bad Leaver - where there is an expectation that a shareholder will commit a certain amount of time and effort to a company in return for shares (normally as an employee), these provisions will require the shareholder to offer their shares back should they cease their involvement in the company. "Bad Leavers" are normally those who resign or are dismissed and generally have to offer their shares back for no value. "Good Leavers" are normally those who cease to be involved in the business on the grounds of health, or who die in service. A good leaver would generally receive market value for their shares.

Matters requiring consent - under general company law, key business decisions can very often be made by agreement of a majority of a company's directors. Examples include hiring senior staff, purchasing new premises, or borrowing money. In order to protect shareholders, it is often sensible for a Shareholders' Agreement to have a clause which only allows a company to make certain pre-defined decisions if all (or a significant majority - perhaps 3 out of 4) shareholders agree in writing. This aims to ensure that a company's resources are only deployed in a way that all stakeholders are comfortable with, and that a majority of shareholders do not "gang up" on a minority.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.