Shareholder Disputes

Disputes can cost up to six figures and even close businesses because documents to regulate the relationships of those in charge were not agreed.

 

Elaine McLaine, an associate specialising in company law with regional firm BHP Law, and Martin Barber, managing partner at Evolution accountancy and taxation firm, laid out the consequences at a seminar in the Tees Valley called Avoiding Shareholder and Partnership Disputes.

 

Elaine said it was critical that every company and partnership had articles of association and agreements that laid down directors’, partners’ and shareholders’ rights and obligations in case things ever turned sour.

 

Increasingly, lenders will expect formal agreements to be in place before they will agree finance.

 

She explained: “So often we hear ‘we have known each other for years, we trust each other, nothing will go wrong’, and yet it does. Because there is no value in the business at day one people don’t think formal agreements are important, especially in SMEs. They lose sight of the fact that there could be a breakdown in the future.

 

“Things can, and do, go wrong. That’s why it’s important to grasp the nettle at the start when things are good, and to prevent disastrous results later.”

 

Even having formalised agreements does not mean that tensions will not arise, Elaine told local businesses at the seminar.

 

She added: “You need strong personalities in business and to challenge each other, that’s often what makes a business succeed. But having the documentation in place will stop people going off on frolics, will prevent managing partners paying themselves excessive benefits and so on.”

 

She went on to explain the remedies when shareholder disputes arise, which include derivative action for negligence, breach of trust or breach or duty; dissolution of a partnership; and applications to court for winding up and unfair prejudice.

 

Once agreements were in place it was important to review them periodically, said Elaine.

 

She added: “While remedies to resolve issues exist, they will take focus off trading and that’s not helpful for any business.

 

“We want to avoid litigation, we want businesses to prosper and we want to protect businesses and ultimately the regional economy.”

 

Focusing on the tax implications of disputes, Martin said up to 70 per cent of businesses he came into contact with did not have agreements.

 

“Not having an agreement may force you down the route of selling assets, raising finance or dissolution of the LLP or partnership and that has tax consequences,” he said.

 

Agreements could include terms for succession and retirement and the chance to plan in tax efficient terms.

 

Martin added: “There is nothing like a business split to cause commercial maelstrom. It’s a very difficult time, especially in a family business situation where it may be that cash ultimately proves to be thicker than blood.”

 

For more information, Elaine can be contacted on 01642 660584 and Martin on 01642 221331.