Coronavirus - Could It Make You Fall Out With Your Shareholders?

For most, the temporary closure and restarting of business will disrupt annual trading figures, sales targets and profit margins. Business plans and budgets for the year will need to be re-considered and re-worked in light of an economy, which looks vastly different to that when such plans were originally prepared.

Businesses should seek to take a pragmatic and realistic approach in a post COVID-19 world, and whilst many will (hopefully) be able to pick-up from where they left off, it is an unfortunate inevitability that for some directors and shareholders of private companies, the coronavirus disruption will lead to dispute and disagreement.

So if you are a director or shareholder of a distressed private limited company, and you envisage fundamental disagreement with fellow shareholders or directors on how the business should be managed going forward, what options are available?

Shareholders' Agreement

Generally the best way shareholders can control and protect their interests in a limited company is by having a shareholders' agreement in place. Such an agreement can be entirely bespoke to fit the needs of the shareholders collectively, and as individuals. Shareholders' agreements can include provisions that specifically set out how disputes between shareholders should be resolved. This is particularly important in companies where there is an equal or even shareholding, and decisions cannot be easily passed without a majority (i.e. in 50%:50% companies where if the parties disagree, a 'deadlock' situation arises). Therefore if a shareholders' agreement is in place, then that should be the first port of call in the event that shareholders are not able to resolve the dispute by way of open discussion.

Common methods of dispute resolution found in shareholders' agreements include:

• chairman of the board of directors to have casting vote
• referral to a third party expert or mediator
• put and call options - options agreements whereby the holder of the option may require other shareholders to buy or sell their entire shareholding at a price pursuant to a pre-determined formula
• Russian roulette - one shareholder offers the other shareholder a simple choice: "either buy all of my shares off me, at the price proposed, or sell me all of your shares at the same price"
• Texas/Mexican shootout - a process involving sealed bids being made by the disputing shareholders to buy out the other party's shares. The shareholder with the highest bid will buyout the other shareholder

It may be the case that some, or perhaps even all of the above options are not appropriate for your company’s particular circumstances, and of course each option will have differing advantages and disadvantages such as time, cost and reliance on financial standing of the parties.

Articles of Association

If no shareholders agreement is in place, the parties may need to rely on the provisions of the company's articles of association (Articles). In essence, Articles are a company's rulebook and sets out how the company's internal affairs will be governed. Unlike a shareholders' agreement, every company is required by law to have a set of articles in place, and they must be available to the public on the Companies House website.

Articles commonly contain provisions which may be relevant in a shareholder/director dispute. For example, they may set out whether shareholders are able to remove or appoint new directors to run and manage the company's business, and the specific requirement needed to pass such resolutions.

Articles (as well as shareholders' agreements) can contain specific provisions which apply in respect of transferring shares and these provisions should be carefully reviewed in the event of a dispute.

Unfair Prejudice Petition

If all else fails, a disgruntled shareholder may seek to apply to the court for relief where he believes the affairs of the company are being conducted in a manner that is unfair and prejudicial to his interests (including financial interests). Where the court finds that unfair prejudice has taken place, it will have wide discretion to remedy the prejudice. This can include:

• requiring the company to do, or refrain from doing certain acts
• more commonly, ordering majority shareholders to purchase the shares of the shareholder making the claim, on such terms as the court thinks fit

Court proceedings, however, can be an expensive and a time consuming way to settle disputes, and should only be considered as a last resort. The coronavirus is having an as disruptive effect on the UK's court system as it is on the economy generally. Having a clear shareholders' agreement in place to help regulate disagreements amongst shareholders will help to avoid the need to seek redress from the court.

Action

If you are concerned that the disruption caused by the coronavirus is likely to have an effect on you as a shareholder, you should carefully review your rights under the relevant set of Articles and shareholders' agreement (if applicable).  

If you would like to have a shareholders' agreement in place for your company, or its Articles reviewed, please contact a member of our Corporate Law team, or complete the below form.