Commercial litigation solicitor Emma Slade reviews the law governing shareholder disputes in a family company.
“When it was good, it was very very good.
But when it was bad, it was horrid.”
With sincere apologies to Longfellow, the above really does encapsulate what it is like when a company is operating well with all its directors and shareholders working in harmony; and sums it up when they don’t. But what can you do when things turn bad; especially if you are a shareholder and the directors are holding all the cards, or your proposed opponent is a member of your family – a spouse, a parent, a sibling etc.
Although it is the large, multinational companies that make the headline news, the vast majority of companies we don’t hear so much about are the small family companies where someone has had a brilliant idea for a business and brought in other family members. Usually, they simply start a business without thinking too much about the long term. All the very best intentions are there – equal authority, equal workload, huge dividends etc – and you all think are you are working with the same ideology. But then something goes wrong, and a dispute arises. Each member has an equal shareholding, or an equal vote on the Board of Directors, and as a result, it can put the company into a deadlock situation, and mean that it cannot function.
If you become embroiled in a dispute with other members of the company, be they other shareholders or directors, what options do you have? Invariably, you cannot sell your shares to a third party (and who would want them if you are a minority shareholder anyway?) so are you are stuck with no recourse? You have no say in running the company, yet you can’t get your money out. Is there anything you can do?
Yes. There is.
Situations like this, where a company has developed out of a close relationship, are sometimes termed a “quasi-partnership”. Although the legal relationship is governed by the various Companies Acts, if there is a relationship of mutual trust and understanding, the courts do not have to rely on a party’s strict legal rights, and can take into account any informal agreements that the parties may have relied upon. In other words, whilst the Articles of Association may set out the formal relationship between the parties, the court can also take into consideration the family relationship as well.
Examples of this are:
- Being excluded from a project that was the reason for the company being set up
- Being dismissed as a director and as an employee
- Making major decisions for the company without your input, eg. taking out large loans
- Not providing you with information, eg. financial accounts
Not all family-run companies will be considered a quasi-partnership, so if there is a dispute, you cannot count on this in bringing a claim. But if the courts do make a finding that there is a quasi-partnership, the affected member can expect the court to uphold their equitable rights in the company, which may even include making an order that the other members of the family buy you out at a fair share value.
When a company and all its members are working well together, it is great; when they aren’t it is horrid. But it doesn’t mean you don’t have any recourse to ensure your legal rights in the company are recognised.
