Disputes between shareholders can have serious consequences. They disrupt management decisions, damage business relationships, drain financial resources and destroy share value.
A well drafted Shareholder Agreement can introduce a mechanism to overcome these.
THE DEADLOCK PARALYSIS
Deadlock arises when equal shareholders cannot agree on key decisions. Paralysis follows the business cannot function.
Possible remedies include:
- giving a chairman a casting vote;
- appointing an independent arbitrator;
- Texas Shootout, allows sealed bids with the highest bidder buying out the other shareholder;
- Russian Roulette where one shareholder offers to buy out the other at the same price and where if the other shareholder chooses to they can reverse the bid and get to purchase;
No shareholder agreement or both shareholders reject the settlement then either can petition the Court to wind the company up. s.122)1)(g) Insolvency Act 1986.
But, the Court can refuse and the shares must have been held for at least 18 months.
THE BREACH OF AGREEMENT
When a shareholder breaches the Shareholder Agreement?
Possible remedies include:
- Damages so monetary compensation for quantifiable losses;
- Specific performance to compel observation of the contract;
- Injunction to prevent a threatened breach;
- Forced share transfer, requiring automatic transfer notice provisions;
- Without prejudice negotiations;
THE SHARE VALUATION DISPUTE
There are different valuation methods? Disagreement often revolves around the method used.
Examples are DCF or discounted cash flow used to asses future earnings. Useful for profitable companies with regular cash flow;
EBITDA or earnings before interest, taxes, depreciation and amortization. Often used to see if a company can service its debt but it can overestimate profits because it ignores the cost of financing, taxes and necessary capital expenditure such as to replace worn out assets.
Net Asset Valuation simple plusses and negatives. This is better for property holding or investment companies.
Possible remedies include:
- Appointing an independent expert rather than have a costly Court battle.
DIRECTOR MISCONDUCT
Directors owe several important duties to promote the success of the company under the Companies Act. Example duties include misuse of company assets for personal benefit; breach of fiduciary duties such as if there is a conflict of interest; fraudulent or wrongful trading; poor governance;
Possible remedies include:
- Remove the director;
- Damages for loss suffered;
- Injunctions;
- Shareholder derivative claims (brought on behalf of the company);
A bespoke Shareholder Agreement cannot avoid issues arising but can provide dispute resolution mechanisms that are significantly cheaper and quicker than litigation.
ALEXANDER BUSINESS LAW SOLUTIONS are lawyers for business and draft Shareholder Agreements to cater for diverse business and shareholder needs.