The types of dispute that may arise within a company are varied. The corporate governance issues can require accounting, financial and legal expertise to resolve. Our team at Francis Wilks & Jones has helped numerous companies and businesses owners, from early planning and shareholder agreement advice, to dealing with the resolution of shareholder and partnership disputes - both inside and outside court.
Companies and partnerships tend to share a common feature in that they are seen run by a limited number of individuals, often for the benefit of many others.
In a company, management and day to day control is normally vested in board of directors, who in turn act on behalf of the company’s shareholders. For a limited liability partnership (“LLP”), it is the designated members who act on behalf of all members of the partnership.
Subordinate to the directors and designated members are the other stakeholders in the business, comprising
- suppliers (who may also be creditors);
- finance providers;
- regulatory bodies; and
- the general public.
The arrangement between the management and the other stakeholders is a delicate relationship based on a trust. Directors and designated members have a duty of good faith to the business and also various common law duties codified under the Companies Act 2006 and associated primary and secondary legislation.
Quite often an SME business has the same owners who also manage its affairs. For companies these are referred to as quasi-partnerships, as they are run in a similar manner to a partnership business (as with LLPs).
Set out below are some of the more common situations we see members experience and how we can assist.
Minority shareholders / non-designated partners
For minority shareholders, their say in the company’s business is often limited to their role and the extent of their control in the company’s affairs.
Where minority shareholders are uninvolved in the company’s business, their involvement is solely in respect of any general meetings called (although AGMs have not been required to be called since 1st October 2007, but if your company was incorporated before that date then there may still be such a requirement). We see a lot of minority shareholders whose only interest is their annual dividend, which may or may not be paid by the company dependent on the dispute and the complaint as regards the directors / co-shareholders’ conduct.
For non-designated partners, their interest will be set out in the partnership agreement which should provide for annual meetings and the designated partners should set out annually the return of profits and capital/current account aggregations. Where such returns are unsatisfactory, or there is some other complaint as regards the redirection of funds or deterioration of the business, in a partnership any resolution sought to be passed is usually by reference to a show of hands or a poll in accordance with the interest held.
Commonly, we see SME businesses run with a majority or significant member in control of the finances, with the smaller (by interest) members suffering as a result of an inability to influence
- the business direction;
- dividend policy;
- calculation of profits;
- failure to exploit opportunities; or
- even the redirection of the business to other competing businesses (perhaps solely owned by the wrongdoing designated partner / director).
Most commonly, two individuals set up a business with equal shares, as the only controlling minds (as directors or designated partners) and with neither holding more than the other, to ensure perfect quality of arms.
Whilst this is satisfactory to ensure neither has an advantage, for the business this deadlock means that if they fall out the business is unable to make decisions at board level and further the ongoing dispute may prevent the business being able to continue trading. Ultimately, a 50% interest is a minority interest.
We commonly see such deadlock occur, sometimes (for a company) broken by one party removing his/her colleague as a director at Companies House or by adjusting the return on the share register (to give the other less of an interest, and therefore the former an interest that enables them to make decisions).
These latter steps are very serious but likely can only be changed by agreement or a court order, as Companies House does not have an active role policing such matters.
- where a deadlock occurs, and if it continues to persist, then in the absence of any negotiated arrangement to correct matters the parties will ultimately have to go their separate ways – whether that be by one buying the other out or by winding-up the company;
- for partners in an LLP this is less of a risk as normally there are a number of partners and / or the partnership agreement should provide for resolution of such disputes;
- but in a company, this a structure is less common. This is where a shareholders agreement should ideally already be in place to govern such disputes.
In the absence of a shareholders agreement, deadlock issues can quickly become problematic. Our team are very experienced in taking the heat out of these situations and attempting to find a solution.
For many companies (including listed companies) the policy to pay dividends to shareholders forms a very common ground of dispute. Ultimately it is the directors who decide whether a dividend should be recommended and the shareholders who decide whether this is agreed.
There is no legal right for a shareholder to receive a dividend. However, case law dictates that in certain circumstances, particularly for a quasi-partnership where perhaps one shareholder / director is receiving a large salary and another shareholder (whether they are executive or non-executive) is receiving nothing, then it is legitimate to expect that dividends would be paid to all shareholders.
Should you require any assistance, please contact our shareholder / director services team who can discuss such matters with you.
“I have found FWJ to be perceptive, to the point and realistic. They have been able to assimilate and forcefully defend a very aggressive claim with very limited historic information.”
A client we advised on a complicated property and partnership dispute