Fair shares
BDO has seen shareholder disputes rise
by some 200% over the past year. It's an arresting number. What's
going on?
“Private company profits have been depressed for a long time now, and people simply can't see an end to the current downturn,” comments forensic services partner Alex Marsden. “People have been hanging on in case things get better, but with no obvious light at the end of the tunnel increasing numbers of people appear to be deciding they might as well bring their underlying grievances to a head.”
Shareholder disputes are manifesting themselves in two main ways: unfair prejudice claims under s.994 of the Companies Act; and post-deal disputes.
The latter are perhaps easier to categorise. “We don't make a habit of discussing our particular cases,” states Marsden, “but a general example could be something like a company being sold and then the buyer discovering that the vendor had misrepresented the status of a contract. They might have bought the business with the assurance that the contract was in place, only to find it had been terminated before the sale. This would obviously have an effect on the value of the company, and the buyer could seek to have the sale rescinded on the basis of fraudulent misrepresentation. We've dealt with similar scenarios in the past.”
But it's the unfair prejudice claims that are perhaps more a symptom of the economic conditions – and potentially more complicated and difficult to resolve. In difficult times, boards and shareholders will look more closely at what everyone is contributing; and in SMEs in particular this can throw a bright light onto matters that have been lurking under the radar.
“Companies will probably already have been through cost-cutting exercises, making efficiencies, redundancies and so on,” Marsden explains. “But what happens when conditions don't improve and there are no other cuts to make? There are lots of board-level people out there working incredibly hard, and it's only natural that they'll look at their co-directors and shareholders and consider whether they're contributing as much – and if not, why they're effectively being subsidised by the company in conditions where you can't carry passengers.
“Or one of the directors might be awarding themselves what's perceived as an unreasonable level of remuneration, reducing the profits and thus dividends to the other shareholders. That will clearly breed bad feeling and perhaps worse.”
And it's not as if everyone will agree on who's worth their position. Is the struggling sales director suffering in a horrendous trading environment, or simply incompetent?
When there are no pre-agreed rules for dealing with issues like this, the consequences can be disastrous for all concerned.
Given all the potential sources of disputes, it's not surprising that testing times are bringing more of them to the fore. But in the event of a dispute, unfair prejudice actions should be treated with caution. “They're complex and highly technical,” says Marsden. “They're based on case law and follow from various incarnations of the Companies Act. They're by no means intuitive, and disputes can end in a place never considered at the beginning of the action, including an actual winding up of the company.”
Far better then for companies to minimise the chances of disputes by ensuring that clear shareholders' agreements are in place, and that their articles of association are appropriate to their business. As Marsden confirms, “Clients need to talk these through in detail with their advisors both from a legal and an accounting point of view so they really understand how certain events could manifest themselves under the agreements. They need to understand the full range of possible scenarios, from best to worst, and make sure that they're happy with what is agreed.”
A good shareholders' agreement doesn't mean that disputes won't still happen, of course, but at least it limits the scope of the disagreement and lays down some ground rules for resolution.
