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When Shareholders and Directors fall out

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Limited liability companies are owned and run by real people. Sometimes these people can and conflict with each other, leading to a director and shareholder dispute.

A Company, however, is a separate legal entity – that is, it is distinct from its directors and shareholders. Problems and conflicts do arise, and often are resolved internally.  What happens, however, when the problems associated with a director and shareholder dispute cannot be resolved as between the Company, its directors and its shareholders?

Examples of issues that are arising and lead to a director and shareholder dispute could include:

A.) Monies being taken out of the Company by a director without the other directors’ knowledge;

B.) The Company (although profitable) ceases to pay dividends;

C.) Shareholders no longer receive reports from the board of directors; or

D.) A director may have set up a competing business using the Company’s contacts and know-how.

As a firm NDP are well versed in advising on the early resolution of such shareholder and director disputes.  The key is to obtain advice early to attempt to stop any further damage or escalation. Whilst the Court can be involved at an early stage NDP are also pragmatic and commercial. We will help you to understand the overall commercial value of the claim, what your ultimate objective is and how best to achieve it.

Options that we can discuss with you to help resolve director and shareholder disputes include:

1.) A  MINORITY SHAREHOLDER PETITION (SECTION 994 COMPANIES ACT 2006)

  • Such a Petition, presented to the High Court, often alleges that the shareholder has been unfairly prejudiced by the way in which the Company is run.  The Court will examine the commercial context and background.
  • The minority shareholder may also be a director who becomes excluded from the management of the Company causing a breakdown in trust and confidence.
  • Often the Court will order that the minority shareholders shares are bought for a fair value.  The minority shareholder has a right to financial information of the Company, which would go towards considering what a fair value may be.

2.) A JUST AND EQUITABLE WINDING UP (SECTION 122 (1) (g) INSOLVENCY ACT 1986)

  • If the Company is deadlocked, but solvent, then the Court can be petitioned to wind the Company up.
  • This is usually pleaded alternatively to relief under a minority shareholder petition above

3.) A DERIVATIVE CLAIM (SECTIONS 260 TO 264 COMPANIES ACT 2006)

  • This is an action that derives from a wrong done to the Company.  The shareholders seek to enforce the Company’s legal right, to include breach of duties by directors.  The claim must be vested in the Company.
  • The permission of the Court must be obtained to bring the action. The Court will want to see a good arguable case and consider whether a reasonable director would bring the case.
  • The Court will in deciding to grant permission consider commerciality, cost and the prospects without litigation.

4.) INJUNCTIVE RELIEF

  • This is the ‘nuclear’ remedy if there is going to be significant or ongoing damage to the Company in order to protect its interests. This can variously include, for example, restraining presentation of a winding up petition or a ‘springboard’ injunction to stop a director unfairly competing with the Company using its contacts and know-how.

These are by no means all of the options available for resolving shareholder and director disputes.  NDP’s shareholder disputes team is one of the few teams to comprise lawyers whose main day to day occupation is acting on shareholder and director disputes, and has a strong track record acting for and against directors and shareholders who have found themselves in conflict and in need of guidance.

Should you find yourself in such a dispute, our advice will be commercial, pragmatic and tailored to your circumstances. Often, the threat to your opponent of one, or more, of the above options can be enough to bring your opponent to the negotiating table and a solution.

Please contact us for a free initial discussion, and the sooner you do so, the more likely it is that we can help.

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