When shareholders and directors ‘fall out’

This can be the result of personality clashes but also more fundamental wrongdoing including breaches of the fiduciary duties directors owe the Company. For example:-

1. Monies being misappropriated by a director without the other directors’ knowledge;
2. The Company (although profitable) ceasing to pay dividends;
3. A Director setting up a competing business using the Company’s contacts and know-how.

Disputes of this nature are often not only time consuming and distracting for those involved but potentially also impact the viability of the Company. Equally, no one wants to feel that they are being taken advantage of or that their hard work is being eroded.

The key is to obtain early advice with a view to preventing any further damage or escalation. It is often in the interests of the Company and the people involved to reach a prompt, pragmatic and commercial resolution.

If this is not possible the options available to resolve director and shareholder disputes include the following:-

1. A minority shareholder petition – Such a petition, presented to the High Court, alleges that the shareholder has been unfairly prejudiced by the way the Company has been run (e.g. allegations of misuse or misappropriation of Company monies). The Court will examine the commercial context and background. The minority shareholder may also be a director who has been excluded from involvement in the management of the Company. In certain circumstances the Court will order that the minority shareholder’s shares are bought for a fair value after an examination of the financial position of the Company. Provisions in a Company’s articles or shareholders agreement can have an impact on the order a Court will make.
2. A just and equitable winding up – If the Company is deadlocked, but solvent, then the Court can be petitioned to wind the Company up.
3. A derivative claim – This is an action that derives from a ‘wrong’ done to the Company. The shareholders seek to enforce the Company’s legal rights. The permission of the Court must be obtained to bring the action and the Court will consider whether a reasonable director would bring the claim. In deciding to grant permission the Court will consider commerciality, costs and prospects.
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 include a ‘springboard’ injunction to stop a director unfairly completing with the Company using its contacts and know-how.

More often, the threat of one, or more, of the above can be enough to bring people to the negotiating table and the dispute is capable of being resolved using mediation or some other form of Alternative Dispute Resolution.

Lupton Fawcett LLP can help you to understand the overall value of the claim, what your ultimate objective is and how best to achieve it. Should you find yourself involved in such a dispute, our advice will be commercial and pragmatic but also robust and tailored to your circumstances.

For more information, or to discuss a potential dispute of this nature, please contact Simon Lockley (Partner) or Kirsty Coggin (Senior Solicitor) in the Sheffield Dispute Management team.