Sometimes shareholders simply can’t see eye to eye – so what happens next? Our Commercial Dispute Resolution team takes a look.
We all like to go into business with people who share our ideals, goals and values. However, there may be times when the shareholders of a business simply cannot agree and are unable to produce a majority vote on a key decision. The situation, often referred to as a deadlock, can have serious consequences for a business if not resolved.
What happens if shareholders reach a deadlock?
Deadlock should be avoided if at all possible, and there is often a way through if shareholders are willing to negotiate or compromise. However, if shareholders simply cannot agree then the first course of action should be to refer to the shareholders’ agreement, or the company’s articles.
What are shareholders’ agreements and company’s articles?
These two documents, or sets of documents, detail the rights and responsibilities of shareholders or directors. It is helpful for all limited companies to have these drawn up at the time of shares being distributed, and reviewed each time a new shareholder comes into the fold.
- The company’s articles describe the rights of both directors and shareholders. They contain written rules about running the company, agreed by shareholders of guarantors, directors and the company secretary. If you are unsure about how to proceed in a deadlock, the articles can often set out the next steps to be followed.
- A shareholders’ agreement is a binding contract between the shareholders only, and usually sets out the rights and responsibilities of the shareholders, decision making processes, how a potential deadlock between the shareholders can be resolved and alternative dispute resolution (ADR) options.
What if we don’t have these documents, or they don’t help us?
Not all companies have the right articles and agreements in place to deal with deadlock – and in this scenario, they will need to reply on other matters to resolve the problem. There are several options, and which one you choose will vary depending on circumstances.
It is recommended that you seek the advice of a commercial dispute resolution specialist before deciding which path to go down. Possible courses of action include:
- Further negotiations, with legal advice. Negotiations between shareholders in the boardroom may have failed, but bringing legal advisors in to advise on key matters could help unlock a way through. The aim is to be able to reach a swift resolution without the need for escalated action whilst also maintaining the business relationship between the shareholders.
- Alternative Dispute Resolution (ADR). If the negotiations between the shareholders fail, or if the parties do not anticipate that direct negotiations will result in a breakthrough, the parties can rely on methods of ADR to break the deadlock. This could be in the form of a mediation whereby the shareholders (and often their legal representatives) will appoint a mediator who can act as a neutral third party to assist in reaching an outcome.
- In this scenario an appointed arbitrator will review the parties’ positions, and make a decision which both parties agree to be bound by. This is also a form of ADR which, although similar to court proceedings, can be a cheaper, quicker and a less costly alternative. It also ensures that the matter is dealt with privately which is to the benefit of the company.
- Alter the voting percentages. Changing the voting percentages could help ensure that a majority can be achieved. This can be achieved either by purchasing the shares of the dissenting shareholder(s), if this option is available, or by introducing another shareholder to the company. Be careful – these options will have an impact on the ownership structure, and the potential value of the shareholding, and may not be approved by the other shareholders. Take legal advice before making such a decision.
- Go to court. If all else fails and a breakthrough cannot be achieved in any other way, the shareholders could refer the matter to the court to resolve the dispute or potentially order a winding up of the company. This is a costly option, and some cases can take years to get to trial. The court proceedings would also become a matter of public knowledge, which could result in negative publicity for the company. This is why court should be treated as a last resort.
How can Thrings help?
Prevention is always better than cure, so may need us to review your company articles and shareholders agreement, or draft entirely new ones, to ensure your company is best prepared and protected.
If there is a disagreement among shareholders already, or a disagreement in the offing, we can help you by advising you on your rights under the company documents, any risks with your position, options for taking it forward and how best to manage a dispute. It’s best to act in the early stages wherever possible.
The Thrings Commercial Dispute Resolution team advises shareholders and directors on a wide range of business disputes, and includes specialists in alternative dispute resolution, and litigation. Find out more here.
