No matter what type of business you run it is sometimes unavoidable to become involved in disputes between owners. Disputes may have a detrimental effect on the business, therefore it is important to get these resolved as quickly and efficiently as possible.
Disputes between owners arise often because one owner or a group of owners believe that others are not making decisions in the best interest of the business or not adequately representing the interests of the business. Disputes can also arise as a result of disagreements over direction, breach of contracts or differences in compensation. It may even be the case that minority shareholders are being “frozen out” of the decisions of the business.
Should a dispute not be able to be resolved through agreement or mediation, there are a number of further options to consider. Some of which, depend on the business structure. Decisions will often centre on factors such as whether there has been misconduct or dishonesty, whether one owner wants to continue with the business and the viability of the business.
As outlined above, the resolution of disputes between business owners is not a ‘one size fits all’ process. It is essential to remain flexible in terms of approach and discuss a range of possible outcomes in order to try and resolve a dispute. Ison Harrison are here to assist in finding the most beneficial outcome for yourself or your business.
Selling an owner’s share in the business
Any agreement to purchase/sell your share in the Partnership assets will need to be dealt with in a formal legal agreement and will be conditional upon the departing partner relinquishing all interests in the Business and the assets.
The original Partnership will be dissolved, with the acquiring partner/s taking on the business as a sole trader or a continuing partnership. So from an outsider’s point of view, the business will remain unchanged.
Dissolving a Partnership
If an agreement cannot be reached for one partner to purchase the others interest in the business then the next step is to consider serving formal notice to dissolve the partnership.
The partners can unanimously agree to dissolve the partnership, regardless of the terms of the partnership agreement (section 19, Partnership Act 1890).
At the point that notice to dissolve the partnership is served it will be necessary for the partnership assets to be sold and accounted for by an accountant when preparing dissolution accounts. Each partner will then receive a % of the net value of the partnership after deduction of all legal and accounting costs.
If a dispute does arise, a Shareholders Agreement should also set out the manner in which it can be quickly resolved. In this way you can begin to focus more on the business rather than on arguing amongst yourselves to the detriment of the business.
If an agreement cannot be made, you may need to consider the following options:
Sale of Shares
One option could be for one party to buy out the other. Alternatively, a clean way to resolve the dispute and allow all parties to move on without feeling one is getting a better deal than the other is for all of the existing shareholders to align their interests by selling the company to another party.
Winding Up the Business on ‘Just and Equitable Grounds’
Shareholders that meet certain conditions are entitled to present a petition to have the company wound up on the grounds that it would be just and equitable to do so. This right arises from the Insolvency Act 1986 (IA 1986) under section 122(1)(g).
Under section 994 of the Companies Act 2006 a shareholder may bring an unfair prejudice petition and seek relief where:
- the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to the interests of the shareholders generally, or some part of the shareholders, in their capacity as such (including at least him/herself); or
- an actual or proposed act or omission of the company is or would be so prejudicial.
Breach of Fiduciary Duties
Fiduciary Duties of Directors are outlined under section 171-177 of the Companies Act 2006.
- Duty to act within their powers as conferred by the company’s constitution and for their proper purpose. (s171);
- Duty to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. (s172);
- Duty to exercise independent Judgment. (s173);
- Duty to exercise care, skill and diligence that would be exercised by a reasonably diligent person with both (i) the general knowledge, skill and experience to be expected of a director and (ii) the general knowledge, skill and experience that the director has. (s174);
- Duty to avoid any situation where they have or can have an interest that directly or indirectly conflicts with or may conflict with the company’s interest. (s175);
- A Director must not accept benefits (e.g. gifts of inducements) from third parties arising from his position as a director or which are intended to induce the director to act in a certain way. (s176);
- Duty to declare to the board of the company the nature and extent of any interest they may have in any arrangement or transaction in which the company is or may be a party to. (s177).
Provided loss or damage was caused as a result of the breach of one of the above duties a shareholder, creditor or company can bring proceedings against the director personally for the breach.
Breach of Shareholder Agreement
If a breach of a shareholder agreement has caused a loss to the other shareholders there may be a claim for breach of contract. Some remedies for breach of contract include:
- Monetary Damages
- Suspending the offending shareholder’s voting rights
- An injunction
- Forcing the offending shareholder to transfer their shares
A restrictive covenant requires the person signing the agreement, to refrain from doing something and these are often in Shareholder Agreements.
The primary remedy for breach of a restrictive covenant is a permanent injunction to restrain the breach. However, the courts have jurisdiction to award damages instead of an injunction.
The most cost-effective and least disruptive way to resolve disputes between business owners is to avoid litigation. However, if a dispute does become the subject of litigation, we can represent and advise you in relation to the same, whether in connection with unfair prejudice proceedings between shareholders, or disputes between partners.