Alarming Rise In Shareholder Disputes Sparks Concerns Across UK Businesses
Facebook co-founders Mark Zuckerberg & Eduardo Saverin
Why preparing for the worst can deliver the best outcome
In the same way that every relationship faces its fall-outs, every boardroom is susceptible to a major bust-up. Facebook co-founders Mark Zuckerberg and Eduardo Saverin never dreamed how big their Harvard dorm room startup would become and during its meteoric rise the two had a disagreement on the future of the company when Zuckerberg objected to Saverin’s lack of commitment. The fallout resulted in Saverin losing all but a small share in the company because Saverin had signed over all of the intellectual property to Zuckerberg in the partnership agreement.
When it comes to businesses, there are ways to prepare for, and even pre-empt, potentially destructive conflict.
As with all types of disputes, boardroom disagreements can vary between being relatively trivial to utterly destructive. What is important is preparing for such challenges, and that can be achieved by having a robust process in place specifically designed to handle that conflict. Typically, this means a formal, legally drawn-up shareholders’ agreement ensuring that there is a mechanism for disputes to be resolved (or even prevented in the first place).
Of course, disagreement is not necessarily a bad thing, indeed it is often seen as a sign of a healthy board, but if disagreements are left unresolved this can lead to serious difficulties, especially when disagreements are personal (for example between family members on the board). The potential financial impact of such a disagreement may be significant for the company, sometimes leading to an unresolvable breakdown of boardroom relationships and reducing the value of the business.
So, how can you prepare for the worst?
Steve Morris is one of the UKs leading commercial litigation lawyers and a partner at award-winning firm JMW Solicitors. Steve’s experience includes successfully running to trial a highly charged multi-million pound shareholder dispute and obtaining judgement for £10.8million alongside obtaining a finding of fraud on a fraudulent warranty claim.
Steve Morris, Partner at JMW Solicitors
In order to best prepare for the unexpected, Steve suggests the following:
The Necessity Of A Shareholders Agreement
Ideally, a company is well advised to have a shareholders’ agreement in place for the benefit of their shareholders and the business, especially as such agreements typically provide clarity in respect of the key decisions to be taken, the rights and obligations of the shareholders, the appointment and dismissal procedures in respect of directors and the sale of shares in the company.
A shareholders’ agreement will usually provide a procedure for resolving disputes, including the potential removal of a shareholder, as well as specific contractual remedies which can be actioned such as a claim for damages, specific performance, breach of fiduciary duty, unfair prejudice under the Companies Act 2006 and more.
Articles Of Association
All companies are legally required to have articles of association in order to be fully incorporated.
Many companies automatically adopt ‘model’ articles of association, which are the standard default articles a company can use and are prescribed by the Companies Act 2006. However, companies can - and should - tailor their articles to their particular needs and circumstances. One of the benefits of a shareholders’ agreement over bespoke articles is that a shareholders’ agreement is a private document between the shareholders themselves, whereas the company’s articles are a public document and must be filed at Companies House.
Both shareholders’ agreements and articles of association can cover the relevant aspects of corporate governance, including the resolution of disputes between shareholders. Such dispute resolution measures could include allowing for certain decisions to be made by a simple majority voting threshold, granting certain classes of shareholders greater voting power, compulsory cancellation of shares in instances of certain events or actions by a shareholder, or giving the company the power of compulsory buyback of its own shares.
As with all relationships it is always tempting to think “this will not happen to us” and therefore avoid putting in place any “what if” safety provisions. But, especially in this area of commercial life, prevention is better than the cure, not least because of the large discrepancy in costs between getting good advice about prevention mechanisms against fighting out a protracted and potentially very expensive dispute.