Shareholder and member services

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Overview

All companies are owned by their members, mostly comprising shareholders in a private company limited by shares. 

• the shareholders own the company, which protects them from business risk by enabling them to invest and run a company without bearing any personal liability in the event it goes wrong;
• they are able to delegate the management of the company to directors, whose primary duty is to act in those shareholders’ best interests;
• this duty (of directors) owed to shareholders is codified under the Companies Act 2006 and associated legislation. 

Limited liability partnerships (“LLPs”) are slightly different to companies.

• to a certain they extent consolidate the ownership and management of the business, whilst also providing the partners/members with the protection against business risk;
• LLPs also offer certain tax advantages and enable the business affairs to be more closely monitored by its members, with a degree of involvement in the day to day running of the LLP;
• LLP members technically have more access to the books and records of the business.

Shareholder disputes

Shareholder disputes can be an unfortunate fact of business life.

Shareholders also have duties to each other, including duties of fidelity and trust in all dealings associated with their respective company, to ensure

• impartiality when acting as a director or in respect of any decision to be made by or on behalf of the company; and
• to ensure that all shareholders are treated equally (regardless of how much of the company they own).

Corporate disputes often revolved around the same issues

• an understated or unpaid dividend;
• a perception that one party is drawing more than the other;
• a complaint on mismanagement of the business;
• serious allegations including personal interest conflicts;
• breach of non-compete covenants;
• removal of assets;
• alterations of company registers; and
• fraud.

Ideally such disputes should be resolved by negotiation and the open engagement of all parties.  The business itself should be independent of the dispute and how the business is managed is a matter which should be resolved between its owners. 

Corporate and partnership risks

The risk of any dispute within a business is the loss or reduction in effectiveness of that business.  Often, if there is a notified dispute, disagreement or deadlock within a company, the bank will freeze the accounts until this is resolved.  This could have the consequential knock on of suppliers not being paid, the business being unable to operate and – worst case scenario – a creditor seeking to wind-up the company.

The recent Covid-19 outbreak demonstrates how fragile business is, with a large number of high-profile corporate failures and a large number of smaller business failures likely to continue in the coming years.  Any instability within an SME business can create huge risks – especially where its owners are not in agreement.

Shareholder and partnership agreements

Shareholder and partnership agreements can be hugely important for any business.

For almost all SME businesses, whether they are a limited company or an LLP (which form a majority of such businesses), prevention is far better than a cure.

• historically a partnership agreement would act as a partnership’s constitution governing disputes and dispute resolution within the business;
• these tend to be bespoke to the partners’ interests and are frequently adopted by LLPs, and form a point of reference in respect of any LLP dispute. 
• for companies, the standard Articles of Association, including the New Model Articles, are often already in place for a new company and are rarely amended to reflect the shareholders’ interests. 

Whilst the Articles set out rules on corporate governance (and indeed have been a feature of companies for the past century) they provide very limited restrictions on dispute resolution, business strategy and consolidation as to what the members’ plans are.

For this reason, and particularly with emphasis on planning for the unforeseen, a shareholders or partnership agreement should be entered into as soon as possible to consolidate the understanding between members. 

Shareholder rights and remedies

Shareholder rights and remedies are vitally important for any business owner to understand

As stated above, ideally disputes should be resolved without the need to issue proceedings.  If a shareholder or partnership agreement exists, this should provide the mechanism for such negotiations.

However, if this is unsuccessful,

• for companies there is a statutory framework to enable disputes between shareholders to be resolved within court, if they cannot otherwise be resolved.  This unfair prejudice mechanism is designed mainly to protect minority shareholder interests and is remarkably effective at resolving such disputes, albeit at a legal cost;
• LLPs whilst subject to different legislation incorporate most of the provisions of the Companies Act 2006 (and associated legislation) although a lot of partnership agreements will exclude the right to bring unfair prejudice claims (as permitted under the partnership legislation).

For more information, please visit our separate web page which addresses in more detail the rights and remedies available to members.

At Francis Wilks & Jones we seek to provide a solution bespoke to the issue you face.  We will ordinarily recommend attempts at engagement initially and/or planning via a shareholders agreement, but we are also extremely experienced in dealing with dispute resolution via a litigated route, either through unfair prejudice, derivative or solvent winding-up proceedings.

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Should you require any assistance, please contact our director services team who can discuss such matters with you.

Francis Wilks & Jones were responsive, available at all times to deal with any of my queries and very reassuring. I would definitely recommend them to deal with proceedings brought on behalf of shareholders – they understood our practical needs.

A shareholder we helped bring unfair prejudice proceedings against a fellow shareholder who had been interfering with the management of the company and damaging its value