Shareholder Disputes

The demise or failure of a company can often be caused by shareholder disputes. These generally arise due to one shareholder perceiving that they contribute more to the company. It could be that they do bring more work in or make more profits, but they need to be aware of the consequences of the actions they take. These disputes are usually where the shareholders are also the directors, i.e. owner-managed companies. Often in these situations, the shareholders see assets of the company as being ‘theirs.’

I come back to the structure of a company. The shareholders are the owners. It’s them that would buy the shareholding. This even applies on a setup basis when their shares may be £1 each. The shareholders then appoint the directors, this It may be themselves. It is the directors who run the company. They will build up the company and the company will probably acquire assets such as office equipment, plant, vehicles, as well as a cash build-up and a build-up of work in progress and contracts. These assets belong to the company, not the shareholders or the directors.

If a shareholder wants some money or other assets out of the company, a dividend will need to be declared and a director’s meeting (or Board meeting) will be held to agree that this is appropriate.

In most disputes, the aggrieved shareholder tends to take assets of the company for their own gain and walk away from the company. They may only take half of the cash at bank and half of the contracts in accordance with their 50% shareholding, but they are in the wrong on so many levels by doing this without agreement.

  1. They have fiduciary duties to consider
  2. They have the company creditors to consider
  3. What they perceive as being their share may not be
  4. If no agreement is in place, damages claims could be brought against them resulting in large legal costs.
  5. The blame culture between the individuals involved is not attractive to their contacts and customers (past and present)

So what should shareholders do if they want to part company?

  1. Discuss your grievances. Tell each other how you feel. If you contribute more, is there a reason for this (such as location.) If it is, could different cost centres be set up, could bonuses be set dependent on the profits of each?
  2. If you do decide to split, this needs to be done in a dignified manner. It needs to be agreed and documented so there are no misunderstandings.
  3. Don’t forget that assets to be distributed to shareholders need the approval of the director and a dividend declared. This dividend will then be accounted for on their individual’s tax return.

Claire Foster, our licensed Insolvency Practitioner is familiar with the situation and can offer valuable advice to people in this kind of predicament. Do not hesitate to call her on 01302 965485 for a chat. Initial advice is free with no obligation.