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Shareholders falling out

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Taxation and law are complex subjects and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

It is very easy for shareholders in small companies to fall out. The tensions have usually been going on for some time and the spark is either financial or a “big personality”. Either way, once the fall out starts in small companies, it is normally impossible to put things back together again on a lasting basis. Advance planning is the best approach to avoiding the situation ending in expensive litigation which could sink the business.

Shareholder Agreements

These are usually a good idea in smaller businesses. It is an opportunity for the investors to think about what they want from the business and to anticipate the challenges facing them. Meeting and making compromises at the outset allows more wriggle room later on when situations may be thrust upon the company. The shareholder agreement is at the least a starting point for a discussion later on.

Financial

Financial disputes quickly escalate. This can occur if the business experiences cash flow difficulties or if the business receives an unexpected windfall. In both cases shareholders will have different ideas about the best solution or what to do with excess cash. In many cases the latter is more likely to lead to a dispute. This is difficult to deal with in shareholder agreements but should be tackled so the likely scenarios are covered off.

The “Big Personality”

This is a problem in many organisations. The big personality dominates meetings and creates resentment from fellow shareholders. This kind of person can easily take over board meetings. The best solution is to deal with the person at the outset and explain the effect he/she is having on the business. Often they will also be demoralising employees by their overbearing behaviour. These people can become very toxic in the company and their departure may be inevitable as they rarely change their ways.

Read the small print

The memorandum and articles and shareholders agreement may deal with the problem which has arisen. It is best to go through the documentation carefully before taking any position.

Dual roles

In smaller companies a shareholder will often be a director and employee. Distinguishing between these roles can often be difficult for people to do. However if a problem starts you should step back and see in what capacity the problem is occurring. For instance if the problem is an employee one then this should not affect the shareholder position.

Litigation

Litigation is to be avoided but if it seems inevitable you are probably best getting on with it. You can try to mediate but must use a mediator who is experienced in shareholder disputes. The right choice of mediator can be more important than the process itself. Mediation can work by giving parties a forum to make their point forcefully to the other side without huge legal costs building up. The mediator has to be able to get the parties to move their positions and this often has as much to do with the mediator’s ability to read the psychology of the parties’ minds as it has to do with money.

Legal costs

Litigation equals legal costs which can quickly escalate and become a problem in settling the case. Parties may think that the company should pay the costs which is unhelpful in discouraging protracted disputes. It is best everyone thinks carefully about costs before they get involved in litigation. The company or one of the shareholders may have litigation costs insurance.

December 2017
David Anderson
Solicitor-Advocate and Chartered Tax Adviser