Disputes between business partners are common in private companies. What begins as a disagreement about strategy or management can sometimes develop into a situation where the relationship breaks down completely.
When that happens, one of the most common questions asked by shareholders is whether they can force the other party to sell their shares and leave the business.
The answer depends largely on the structure of the company and the agreements that govern the relationship between the shareholders.
Do shareholders have the right to force a sale?
In most companies, shareholders cannot automatically force another shareholder to sell their shares simply because a dispute has arisen.
- Ownership of shares normally gives the holder the right to keep those shares unless they choose to sell them.
- Unless there is a contractual provision that allows a forced transfer, a shareholder cannot usually be compelled to give up their stake.
However, many companies have shareholder agreements or provisions in their articles of association that deal with this type of situation. These documents may contain mechanisms designed to resolve disputes or allow one party to exit the business.
What do shareholder agreements usually say?
Shareholder agreements often include provisions that allow shares to be transferred in specific circumstances. These clauses are designed to help companies deal with disputes without resorting to litigation.
For example,
- some agreements contain “drag-along” provisions which allow a majority shareholder to require minority shareholders to sell their shares if the company is being sold.
- others include “buy-out” or compulsory transfer provisions that apply if a shareholder breaches the agreement or stops working in the business.
Whether any of these provisions apply will depend on the wording of the agreement and the structure of the company.
What happens if there is no agreement?
Where no shareholder agreement exists, resolving the dispute can be more complicated.
If neither party is willing to sell and neither has majority control, the company may reach a position of shareholder deadlock. Important decisions cannot be made and the business may struggle to operate effectively.
In these situations, the parties often attempt to negotiate a buyout or other commercial solution. This may involve one shareholder purchasing the other’s shares, sometimes with an independent valuation of the company.
If negotiation fails, legal remedies may be available in certain circumstances.
Are there legal options to resolve the dispute?
Where a shareholder believes they are being treated unfairly, the law provides certain protections.
For example, a shareholder may be able to bring a claim if the company’s affairs are being conducted in a way that is unfairly prejudicial to their interests. In some situations the court may order the majority shareholder to purchase the minority’s shares at a fair value.
These cases are highly fact-specific and often involve careful examination of the company’s history and governance arrangements.
Finding a practical solution
Disputes between business partners can be stressful and disruptive for the company involved. While legal remedies exist, many cases are resolved through negotiation once both parties understand the options available.
Taking advice early can help clarify the rights of each shareholder and identify possible ways to resolve the dispute before it escalates further.
Understanding the company’s constitutional documents and the commercial realities of the business is often the key to finding a workable solution.
Whatever your situation, our shareholder disputes experts are here to help. We have been advising business owners and directors for over 25 years.
My situation involved the disposal of a minority shareholding in a small business. On the face of it there didn’t seem much I could do but following my introduction to Francis Wilks & Jones and more particularly Maria Koureas-Jones and with the help of her colleagues they patiently worked away to counter the other sides arguments and eventually achieved a very satisfactory result for me. I can highly recommend all at Francis Wilks & Jones.
A shareholder for whom we successfully settled a shareholding disposal dispute
