Is your business protected against shareholder disputes?
Dave Hulbert, Director at Leonard Curtis Legal, explains why shareholder disputes often arise from conversations that never happen and how early governance can prevent costly conflict.
It usually starts with a simple conversation that never quite happens.
Two business partners who once trusted each other implicitly stop seeing eye to eye. A family-run company begins to feel the strain as commercial pressures increase. Decisions are made informally, assumptions are left unchallenged and, before anyone realises it, relationships begin to fracture. By the time legal advice is sought, the damage is often already done.
Shareholder disputes are one of the most common - and most disruptive - issues for directors to face. In my experience, they rarely arise because one party set out to cause a problem. They are often the result of businesses evolving faster than their governance structures, combined with a lack of clear documentation around how decisions should be made and disputes resolved.
Many of these cases arise in SMEs that began life as so-called “quasi-partnerships”. Friends, family members or business associates set up a company together, work harmoniously for years and focus entirely on the day-to-day running of the business. Formalities such as board meetings, written resolutions or minutes often fall by the wayside. Good governance simply isn’t a priority - until something goes wrong.
When it does, the consequences can be severe. Once relationships begin to fracture, resolving matters can be difficult, expensive and highly disruptive. More often than not, the real damage has already been done long before lawyers are instructed.
We regularly see cases where individuals find themselves suddenly excluded from management, sometimes without warning. In more extreme situations, one shareholder may have issued shares unlawfully or taken decisions without proper authority. Untangling what has happened, and on what basis, is rarely straightforward.
Financial disputes are also common. Private companies are not always required to produce audited accounts, which can create opportunities for abuse.
The lack of a proper paper trail is a recurring theme. Where decisions have been made informally, without documentation, directors are often unable to explain the basis for key transactions. We see situations where major assets have been sold, shares transferred or funds moved, and nobody can clearly account for why or how. At that stage, parties are forced to seek disclosure through the court process.
Unfortunately, shareholder disputes are rarely resolved quickly. Many end up in the High Court and can take years to conclude. Legal costs must be funded throughout, and, in some cases, those costs can exceed the value of the business itself. The ongoing uncertainty can paralyse decision-making, damage staff morale and erode relationships with customers and suppliers. Ultimately, everyone involved loses.
So how can businesses protect themselves?
The first step is to put a comprehensive Shareholders’ Agreement in place from the outset. This document sets out the framework for the relationship between shareholders, detailing how decisions are made, how deadlocks are handled and how disputes are resolved. It can help prevent disagreements from arising and provides a clear process if issues do arise.
Alongside this, the Articles of Association serve as the company’s formal rulebook. They are a public document that governs the basic rules for how the company is run. Many businesses adopt standard model articles, but these may not suit every company, so it’s important to consider whether bespoke articles are needed.
In practice, the best approach is often to use both documents together; the Articles provide the structural rules, while the Shareholders’ Agreement sets a tailored framework for managing relationships and resolving issues between shareholders.
It is also vital to consider the structure of the business carefully. Each structure comes with its own restrictions and implications, particularly around control, profit distribution and exit options.
Business owners should ask some difficult but necessary questions early on. How do you want to run the company? What happens in the event of a deadlock? The classic example is a married couple or business partners holding shares on a 50/50 basis. While this may feel fair at the outset, it can create real problems if consensus can no longer be reached. Without a clear mechanism for resolving deadlock, the business can grind to a halt.
Clearly documenting intentions is essential. Plans and priorities inevitably change over time, and a shareholders’ agreement allows those changes to be managed constructively.
Accountants and professional advisers play a crucial role here. They are often the first to guide new businesses through these conversations and are well placed to highlight potential issues early. Setting up an “off-the-peg” company without a Shareholders’ Agreement is rarely in anyone’s best interests.
In my experience, most shareholder disputes are avoidable. By prioritising good governance, seeking professional advice early and putting robust agreements in place, businesses can protect both their commercial interests and the relationships that underpin them. Prevention is not only better than cure - it is almost always cheaper, faster and far less painful.
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Leonard Curtis is a trading style of Reach Commercial Finance Limited, registered at Riverside House, Irwell Street, Manchester, M3 5EN. Company Register number is 09056450. Reach Commercial Finance Limited is authorised and regulated by the Financial Conduct Authority, FRN: 753686. Reach Commercial Finance Limited is an authorised credit broker and not a lender. We work with an unrestricted number of lenders to find a potentially suitable arrangement for your consideration. ICO registration ZA069234 and you can check via www.ico.org.uk. We will receive commission from lenders. Different lenders pay different amounts depending on different commission models. For transparency we work with the following commission models: fixed fee, fixed rate of commission, percentage of the amount you borrow and rate for risk (this is based on the risk profile of the business). Further details of the commission model, calculation and amount will be disclosed to you throughout your customer journey. Privacy notice.
Leonard Curtis Legal Limited is a limited company, registered in England and Wales with registered number 09820186. Registered office: Riverside House, Irwell Street, Manchester M3 5EN. Leonard Curtis Legal Limited is registered with the Solicitors Regulation Authority with number 626004.