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Law for Business

Knowhow - guidance - precedents

28 JUL 2014

Shareholder disputes – and how to avoid them

Phillipa Daniels

Barrister

Shareholder disputes – and how to avoid them
By Philippa Daniels, 36 Bedford Row

The start of any new venture is an exciting time, but it is sensible, when setting up a new business, or reorganizing the way in which it is run, to provide in writing for a fair procedure for terminating the business, corporate structure or relationship if it becomes necessary to do so.

The time to ensure an orderly exit from a commercial relationship is at the beginning of it.

The business (whether it be an accountancy practice, a garden centre, a bakery or an insurance brokerage or any other kind of commercial undertaking) is an asset, which is to be distinguished from the structure which is set up to run it. A business can be owned and managed in one of a number of ways:

  • Sole trader (one person running the business alone)
  • Partnership (two or more people investing in and/or running the business but without any limitation of their personal liability)
  • Limited Liability Partnership (similar to a partnership but expressly incorporated under the Limited Liability Partnership Act 2000)
  • Private Limited Company (the company has a separate legal identity and the liability of the shareholders is limited to the value of their shares but the shares are not traded publicly)
  • Public Limited Company (a Limited Company whose shares are traded on a public stock exchange)

Business partnerships can take several forms:

  • Partnership at will
  • Partnership governed by Deed
  • Limited Liability Partnership

Companies can be incorporated in one of a number of ways:

  • Company limited by shares
  • Company limited by guarantee
  • Private Unlimited Company
  • Public Limited Company

Whichever type of corporate structure is chosen to own and run the business the partners or shareholders should aim to reach agreement at the outset as to how they will deal with the business and other corporate assets (such as property) on transfer or dissolution. In a partnership this agreement should be recorded in a partnership deed. In a limited company a number of documents will be needed:

  • Memorandum and Articles of Association for the Company
  • Shareholders’ agreement
  • Director’s contract of employment.

Partnership at Will

In a partnership at will the business partners come together without any specific agreement as to how long the partnership will last, what will trigger its dissolution or how the partners will distribute profits and partnership assets.

Dissolvable by notice

Governed by the Partnership Act 1890

Partnership by Deed

Will provide for notice provisions, distribution of assets, business, how employees are to be dealt with.

Liability will not be limited – partners remain personally liable for each other’s partnership debts

Limited Liability Partnership

Limited Liability Partnership Act 2000 provides for an LLP to be incorporated by an incorporation document which is sent to the companies registrar for registration

Limited Company
Separate legal personality from Directors and Shareholders.

Governed by successive Companies Acts – according to the date of incorporation of the Company

Latest is Companies Act 2006

Table A – Standard Memorandum and Articles of Association set out the regulations by which the Company will be managed but will not govern how company is to be dealt with if shareholders fall out.

Winding up – Solvent/Insolvent/Just and Equitable ground under Insolvency Act 1986

Unfair Prejudice petition under section 994 Companies Act 2006 – the court has a wide discretion as to what order it can make to either wind the company up or to order that one party sells their shares to another, and at what valuation. However, this type of action is notorious for being extremely expensive and damaging to the relationships between the parties.

Value of having a Shareholders Agreement at the outset dealing with:
  • Share valuation methods
  • Voting rights
  • Pre-emption rights
  • Company’s right to buy own shares
The Shareholders’ Agreement is confidential to the shareholders and will not be disclosed to the public.

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