Partnerships and shareholder disputes can arise unexpectedly, potentially jeopardising the success and stability of your enterprise.
In this guide, we'll delve into the topic of partnership and shareholder disputes, provide common examples, and discuss how to resolve these conflicts effectively.
Types of partnership and shareholder disputes
Common examples of partnership disputes
Partnership disputes can take many shapes, but some common scenarios include:
- Breach of partnership agreements – when one or more partners fail to adhere to the terms and conditions outlined in the partnership agreement, conflicts can emerge
- Breach of fiduciary duty – partners owe each other fiduciary duties, which include loyalty and honesty, and breaching these duties can lead to disputes
Common examples of shareholder disputes
Shareholder disputes revolve around disagreements between individuals who own shares in the company. Some common examples include:
- Disagreements over business decisions – shareholders may clash over major business decisions, such as investments, mergers, or changes in company direction
- Resolving shareholder 50/50 disputes – in cases where two shareholders each hold 50% of the company's shares, making decisions can be challenging and resolving resulting disputes requires careful negotiation
- Derivative claims – shareholders may bring a claim on behalf of the company if they believe directors or other shareholders have acted unlawfully
How to resolve partnership disputes
Resolving partnership disputes often requires a multifaceted approach. Here are some points to consider:
The Partnership Agreement
Having a well-drafted Partnership Agreement in place is important for clarifying the roles, responsibilities, and expectations of each partner. This document can pre-emptively address potential conflicts by outlining decision-making processes and dispute-resolution mechanisms. It also allows you to customise the partnership's governance to fit your business's unique requirements.
The Partnership Act 1890
It's important to understand the implications of the Partnership Act 1890. This legislation governs partnerships in the absence of a written agreement. Without a Partnership Agreement, your partnership is subject to default provisions outlined in this act, which may not align with your specific business needs.
Open and honest communication among partners is crucial. Often, disputes arise because of misunderstandings that can be resolved through dialogue.
Mediation and arbitration
Mediation can be a cost-effective way to resolve disputes. A neutral third party can facilitate discussions and help partners find common ground. If mediation proves unsuccessful, arbitration can be a more formal process, allowing an arbitrator to make binding decisions.
Partners can take legal action through the court system as a last resort. However, this can be time-consuming and costly.
How to resolve shareholder disputes
Shareholder disputes can impact a business significantly, making it essential to address them promptly and effectively. Here are a few points to consider when approaching shareholder disputes:
One of the most effective ways to prevent and manage shareholder disputes is by having a well-drafted Shareholders’ Agreement in place. This document outlines the rights and obligations of shareholders and provides a framework for decision-making and dispute resolution.
A well-crafted Shareholders’ Agreement can specify mechanisms for resolving disputes, such as voting thresholds, deadlock-breaking mechanisms and buy-sell provisions. It acts as a contract that all shareholders must adhere to, helping to minimise conflicts.
Shareholder disputes and the Companies Act 2006
Under the Companies Act 2006, shareholders have the option to bring claims for unfair prejudice, ensuring that their rights are protected. This legislation empowers shareholders to seek legal remedies if they believe their interests have been unfairly compromised.
Mediation and Alternative Dispute Resolution (ADR)
Mediation and ADR methods are often effective in resolving shareholder disputes without resorting to costly and time-consuming court proceedings. A neutral third-party mediator can facilitate discussions between shareholders, helping them reach a mutually acceptable resolution. Mediation can be less adversarial than litigation and allows parties to maintain more control over the outcome. It's a cost-effective and efficient way to address conflicts.
Shareholders who believe that directors or other shareholders have acted unlawfully or in breach of their fiduciary duties can bring derivative claims on behalf of the company. These claims allow shareholders to hold wrongdoers accountable and recover losses suffered by the company because of their actions.
Share buybacks and remedies
In some cases, it may be possible to resolve disputes through share buybacks. The company can purchase the shares of a dissenting shareholder at an agreed-upon price, thereby removing the source of conflict. This can be an effective way to end disputes while maintaining business continuity.
Applying to the court
If all other avenues fail, shareholders can apply to the court for a resolution. The court can provide various remedies, such as ordering the sale of shares, injunctions, or even the winding up of the company in extreme cases. However, court proceedings should be considered a last resort as they are expensive and can place be potential strain on business relationships.
Consider the long-term implications
When seeking resolution, you should consider the long-term implications for your business. While addressing immediate conflicts is important, solutions should also support the company's growth and sustainability. Ensuring the resolution aligns with the company's goals and objectives is critical for long-term success.
Get legal assistance from LawBite
While partnership and shareholder disputes can be disruptive and stressful, they’re not impossible to overcome. By understanding the various types of disputes and adhering to best practices in dispute resolution, you can navigate dispute challenges successfully.
When a partnership or shareholder dispute arises, seeking legal advice from solicitors specialising in resolving disputes is an important step.
Our experienced solicitors can help you understand your rights and options, guide you through the dispute resolution process and represent your interests effectively. They can also provide an objective perspective on the situation, which can be crucial in diffusing tensions. To speak to one of our expert lawyers, book a free 15 minute consultation or call us on 020 3808 8314.