Shareholder disputes are not uncommon and many board members will have experienced the difficulties that arise when matters between members become litigious.
There are practical things that can be done to try and mitigate the potential for shareholder disputes and, even when those prove impossible or unsuccessful, directors may still be able to avoid litigation or disruptive shareholder action.
In this short note, Ferbrache & Farrell LLP offers a practical checklist for board members.
1. Am I having regard to my core duties as a director?
Directors can quickly find themselves caught up in shareholder disputes. The best means of personal protection is to focus upon the fact that your duties are owed to the company for which you act and that you need to:
These duties will hold true regardless of the size of the company, the number of shareholders, the nature of any obligations to specific shareholders or whether the company is listed.
2. Can I legislate for shareholder disputes before they arise?
Few people become involved in a company on the basis that they will end up in dispute with their fellow members. It must, however, be recognised that the potential for a breakdown in trust and confidence can occur in any company.
A well-drafted shareholders agreement can help to legislate for the sorts of issues that arise when members end up at loggerheads. A good shareholders agreement may have regard to:
3. Are there signs of potential problems?
In some cases it will be entirely obvious that shareholders are in dispute and that there will be a near inevitable march towards litigation. In other situations, there may be early indicators of potential problems. These may include:
4. Are there any practical things the board can do?
The intervention of independent parties can sometimes be of assistance. Where there are no formal requirements under, say, a shareholders agreement, alternative dispute resolution methods may be worthy of consideration. These could include:
5. Where this could end up?
If a dispute cannot be resolved, then the matter may well end with litigation, forced share purchases, regulation of the company’s affairs by the Court and/or the company being wound up.
Shareholders may have claims that they can bring to require the company (via its directors) to act within the capacity afforded by its constitution or against one another and the company under any shareholders agreement.
Shareholders may also have:
None of these is likely to be conducive to, at the very least, the short-term success of the company. All of them carry the potential for directors to come under significant scrutiny.
As such, we recommend that directors: