When business owners fall out, the carnage
that ensues can be catastrophic and costly, not only for the
shareholders. It can also seriously damage the company itself and
can adversely affect longstanding relationships with both suppliers
If you don’t personally own all of the shares in your
company, perhaps because you were part of a management buy out or
inherited shares in a family company from a relative, there is a
risk that you will not always see eye to eye with each of your
fellow shareholders and the company may not go in the direction that
you want. Unless you “control” the company and the board of
directors, it is essential that you have protection in place by way
of a shareholders agreement or through the company’s articles of
Just like many happily married couples who do not contemplate that
one day they will be party to an acrimonious divorce or fight over
custody of the children, the same often is true for shareholders and
companies. Do you know the top 5 reasons why shareholder disputes
start? (If you can read upside down, the answers are set out at the
end of this article – were you surprised?)
Do any of the following situations ring a bell?
- The main shareholder puts all his personal bills for his new
house through the company credit card and it’s affecting the
cash-flow of the business. I am a director but hold only a small
number of shares, can I stop him?
- A business partner has died and his son is insisting I pay
top dollar to buy his shares, otherwise he will sell them to our
main competitor. Can he do this?
- I have 25% of the shares in my company but I have never
received a dividend, although the company is profitable. Can I
- My managing director has left the company but wants to keep
hold of the 10% of shares I gave to him when he joined us. I am
now doing all the work. Can I force him to sell them back to me?
The answer to all of the above is probably not, unless you have a
shareholders agreement in place.
So what is a shareholders agreement and what does it do?
In a private company, particularly one with a relatively small
number of shareholders who also manage the business on a day to day
basis, the actual process of preparing an agreement often helps
shareholders to work through the key issues. If you are invited to
buy shares in the company, you should not hand over your money
before you see an agreement covering the key areas such as:
(a) the financing of the company;
(b) dividends, directors’ fees, salaries and directors’ loan
(c) transfer of shares;
(d) the resignation of a director; and
(e) whether you have a say in major decisions.
A shareholders agreement will usually specify that the majority
or possibly all of the shareholders need to give approval before
certain things happen. The agreement will also cover how a
shareholder can realise his or her investment in the company and how
the shares will be valued if the other shareholders or the company
have the right to buy them. This is particularly important where a
shareholder’s exit from the company is not amicable and a valuation
of the shares cannot be agreed.
The top 5 reasons why shareholders fall out are as follows:
- Salaries paid to shareholders who also work for the
- Dealings between the company and a private business
owned by one of the shareholders (or their family
- The price to be paid when a shareholder is bought
- The level of dividends.
- Power struggle and poor personal relationships.
Copyright 2006 - 2010 Taylors Solicitors
In addition, the agreement will deal with what are known as “deemed
transfers”. There will be a list of events which automatically
trigger a requirement for a shareholder to sell his shares to the
other shareholders, particularly if he leaves “under a cloud”. They
can also deal with what happens if an offer is received and the
majority want to sell out – do you have to sell too? These kinds of
problems are more common in smaller companies where they can cause
the greatest damage.
We recently acted on behalf of a shareholder excluded from his
company by the major shareholder who was successful in getting his
shares bought at a sensible value by his former company. However,
because he did not have a shareholders agreement, his legal costs in
securing a remedy exceeded the valuation of his shares!
It also took over 2 years to seek redress, but having borrowed
heavily from the bank with a charge over his house in order to raise
the money to initially buy the shares, he was left with no option
but to pursue the action. A shareholders agreement would have either
avoided problems or meant that the outcome was certain, less costly
We understand the issues involved, the rights and duties of the
individuals and the armoury of solutions available, whether they be
by negotiation, mediation, the putting in place of a shareholders
agreement and associated documentation or the ultimate resort to the
court where a minor shareholder’s interests have not otherwise been