These surprises can include:

• rights to issue new shares and dilute somebody’s shareholding;
• the right of first refusal if any shares are sold;
• restrictions preventing the transfer of shares;
• restrictions on the powers of the directors.

Any of these can be a useful weapon in a shareholders dispute.

The lesson is - know your Articles.  

The Articles for older companies will normally be governed by what is known as Table A, which is essentially a framework for corporate governance developed over many decades.  This can make reading the Articles quite difficult as they will often incorporate some parts of Table A but exclude others.  You need to obtain the relevant copy of Table A (which will normally depend upon when the company was formed) and read it together with the Articles.

Newer companies will usually use the model articles provided as part of the Companies Act 2006.  These are more user friendly and written in more simple language.  Nevertheless they are often subject to significant amendments to suit the particular requirements of a company.

Both Table A and the model articles can be obtained by following this link to Companies House.

First, there will be an inclination to side with the majority shareholders in any dispute as they ultimately control the company.  Any firm of accountants looking at the longer term will have to take into account that backing the wrong horse could lose them the business of acting for the company.  For smaller firms of accountants this can be a significant factor.

Even where the accountants act even handedly and remain neutral in a dispute there will often be an intense distrust on the part of some shareholders (typically the minority shareholders).  This can introduce an additional element into the dispute and the parties end up arguing about the veracity of any accounts or whether or not new accountants should be appointed.  This can make a complex dispute even more convoluted and hence difficult to resolve.

In this context it is unfortunate that shareholders agreement often make the company’s accountants or auditors either the arbiter of any dispute (via an expert determination clause) or the valuer who determines the value of shares on a transfer between shareholders (whether voluntary or forced).  Where there is distrust about the neutrality of the accountant then the operation of such provisions can be fraught with problems.  The parties can end up arguing about the dispute resolution or valuation process itself.

Such a situation arises from the best of intentions - to find a cost effective way to resolve disputes, especially about value.  The company’s accountants / auditors are an obvious choice, they know all about the company and the shareholders and should be able to come to a swift and accurate decision.  However, in light of the problems I have highlighted it can sometimes be a false economy.

In addition, general accountants may not have the forensic skills of experience to properly value a company in a contentious situation and may be be completely out of their depth when asked to step into the middle of a serious boardroom bloodbath and reach a binding decision on a particular aspect.

A better approach, especially in more valuable companies where there is potentially more to argue about is to give the valuation or expert determination role to a third party.

In relation to valuation, a clause can be drafted which requires the parties to agree the identity of such a valuer, failing which the valuer is to be appointed by the President for the time being of the Institute of Chartered Accountants for England & Wales.

With regard to resolution of disputes, serious consideration should be given to whether or not expert determination is an appropriate way to resolve what can be very complex disputes and, if it is, serious thought should be given to the identity of the expert.  Choosing the company’s accountant / auditor is unlikely to be the best choice.

The Companies Act 2006 introduced a new procedure for derivative actions which includes a two stage process for permission.  So far the courts appear to have been cautious about allowing shareholders to exercise the remedy but the recent case of Stainer -v- Lee and others may indicate a slightly more relaxed approach.

In this case the court gave permission for the shareholder, Mr Stainer, to pursue a derivative claim on behalf of a company, Kerrington Limited, against two directors of Kerrington and a third party company.  The essence of the complaint was that the directors had made certain improper loans to the third party company.

What is of interest is that Mr Stainer only had a very small interest in the company (0.08%) and it was by no means certain that the actions of the directors, even if wrongful, had or would cause the company a significant loss.

In relation to the first of these factors, the size of shareholding should not really matter as the action is for the benefit of the company and hence all shareholders.  However, this does indicate the possibility of an activist shareholder acquiring a nominal shareholding in a company with a view to bringing just such an action.

With regard to the second factor, this was dealt with by making the permission limited.  The claimant was given permission to proceed up to and including the disclosure stage in the process, at which point the facts and matters in dispute should be more clear and the court would look again at whether to allow it to proceed.

Derivative proceedings ought to be a powerful weapon in a shareholders arsenal but historically the remedy has been relatively rarely used.  It is possible that things may be changing.

Unlike, for example, in a claim under contract, there are no statutory time limits for bringing a claim under s.994 of the Companies Act 2006.  This does not however mean that you can simply store up a dispute or grievance to deploy at a suitable moment.

First, there is real risk that the court will find that you have acquiesced in what has happened (in other words accepted the situation) and therefore no longer have the grounds to assert unfair prejudice.

Second, there is a more specific risk in relation to quasi-partnerships.  Delay in taking action may be taken as indicating an agreement that the quasi-partnership has come to an end.  This may mean that actions which would be unfair in a quasi-partnership company cease to become unfair.  Even if there is still unfairness it may affect the remedy that is available.  Typically in quasi-partnership situations no discount is made in valuing the shareholding to reflect that it is a minority shareholding.  This is not the case where there is no quasi-partnership and this can obviously have a significant impact on valuation.

What this does not mean is that you should rush to court at the first hint of a dispute.  The benefits of jaw jaw over war war are still paramount and the court will not penalise anybody for delay caused by attempts to resolve a dispute without recourse to litigation.

However, you should be aware of the dangers of delay and the fact that sometimes in relation to shareholders claims it is a case of use it or lose it.

All the great ingredients of the main series are there - the over-confidence / arrogance, the backstabbing and the spectacular failures - just in a younger package.  Some business commentators have been very snooty about the educational pretensions of the show - but who cares!  This is entertainment but at the same time it is a microcosm of what goes on and what goes wrong in teams and boardrooms around the country.

I shall not be missing any of the future episodes.

Shareholder litigation is notoriously expensive.  As part of any risk analysis an assessment of the proportionality of taking legal action is essential.  It is rare that any good lawyer will ever advise that litigation should be embarked on as a point of principle.  It should only be contemplated where a commercial case for doing so can be made out.

I am sometimes asked for my personal view on the value of the company but this is very definitely something for an accountant to give an opinion on rather than a lawyer. 

The valuation of companies has an undeserved reputation as being something of a dark art.  However, at the most basic level a company is simply worth what somebody will pay for it (either actually or theoretically)and there are various tried and tested ways of approaching such a valuation which I will not try and summarise here. 

A full blown expert valuation for a court case will cost many thousands of pounds but that is not necessarily what is required at the initial stage of a dispute.  What you need is a ball park figure that can be used as the basis of your initial risk analysis and also potentially form the basis of settlement discussions.

In this latter respect, some disputes are really just about “how much”.  Deep down the parties realise that one or other has to leave and it is simply a question of how much the other will take / pay for the shares.  In these cases it can sometimes be agreed that an accountant will act jointly.  The parties will each pay half of the cost of getting a valuation and either agree to be bound by the valuation or less formally just use the valuation obtained as the starting point for discussions.

A recurring mantra from experienced litigators is that “preparation is key”.  Get all your ducks in a row before firing the first shot.  Getting an early valuation can be an important one of those ducks.

The more cynical reader of this blog might say - “well you would say that, you are a lawyer looking for business”.  Nevertheless, there are real advantages in thinking ahead and a relatively modest investment in a lawyer’s time may pay dividends later.

There are two classic points at which some advice can be of great value.

First, when you are first setting up a company or perhaps bringing new people on board.  There is no better time to set out some ground rules and get a shareholders agreement in place.  A well drafted shareholders agreement could mean that you don’t need to go near a litigation lawyer if things go pear shaped because there is a mechanism in place to deal with it.

Second, as soon as you suspect that a significant dispute might be in the offing.  I am not suggesting that you should get in a litigation lawyer in full rottweiler mode to send out aggressive letters, instead what is generally needed is some background advice about tactics and strategy.

Minority shareholders or 50/50 shareholders often give away their bargaining power too quickly and too easily.  By the time they realise that the other shareholder(s) have taken effective control of the company it is sometimes too late.  You are already fighting a rearguard action.

It is a cliche that possession is nine tenths of the law but what makes it a cliche is its underlying truth.  Physical control of any company is key.  Lose that and you are fighting with one hand tied behind your back.  Some advice on your options at early stage can be vital.

Of the two stages - the best value for money is generally the shareholders agreement.  The cost is generally a known quantity and can be shared amongst the shareholders or even picked up by the company.  For a more detailed article on the merits and typical contents of a shareholders agreement click on this link.

By the time you have got to the second stage, advice on a party’s position in a potential dispute, there is usually quite a lot of baggage that has to be analysed, documents to review and evidence to be considered.  Useful advice at this stage is therefore unlikely to be cheap, but if it can help avoid the costs of full blown litigation then ultimately it will still look like real value for money.

Click here to read the article.

The current climate is one that is intolerant of any suggestion of fat cattery.  The focus has also shifted to the public sector and the pay of the chief executives of councils and other public bodies.

What this means is that there may be some political capital to be made out of a scheme that shifts some genuine power back to shareholders to cap excessive salaries (as opposed to the largely symbolic power that is currently possessed).

Drafting some legislation that actually achieved this without affecting the delicate balance between the interests of the company, its executives and its owners that has been developed over the years -  now that is a challenge!

As any lawyer dealing in this field should know, the law is a very blunt instrument and the chances of it achieving a quick, cost effective or fair result are in most cases fairly slim.  In addition, in most cases protracted litigation will weaken or even destroy the business that is being argued about.

For this reason, alternative dispute resolution (ADR), and in particular mediation, should be at the top of the agenda in any analysis of how a boardroom dispute can be resolved.   These days even the most macho of litigators will accept that mediation is a useful tool (and not “just for wimps” as one city lawyer once opined to me).  However, the problem in getting parties to engage in the process still remains and the role of the lawyer is absolutely critical.

Just like in a divorce the passions and heat generated by the dispute can obscure the commercial realities and cause otherwise sensible people to embark on a course that risks destroying the value in the business they are fighting over.

The stumbling blocks to resolving shareholders disputes are often the same two old chestnuts, which regularly crop up together:

1.  a client who wants his or her “day in court” come what may, and

2.  a lawyer advising them who either does not fully appreciate the legal context or is insufficiently robust to persuade their client to instead take a long hard look at their objectives and how best those can be achieved.

There will always be clients who don’t listen to their lawyers and in those cases litigation is sometimes inevitable.  Likewise there are lawyers who are gung ho because they are inexperienced in the field and then again litigation is more likely.  But the combination of the two is the hardest nut to crack and a situation that can be incredibly frustrating.

Lawyers in the family law area, who experience the same basic problems, have come up with a solution which is starting to catch on.  It is called collaborative law.  The lawyers (and clients) involved sign up to a non-confrontational process with the specific aim of producing a just and fair result, quickly and (relatively!) cheaply.  It ensures the interests of all participants are aligned with the task of achieving a sensible outcome for the parties involved.

Perhaps one day somebody will come up with a similar scheme for likeminded commercial lawyers who are more concerned about outcomes than posturing in court.  Until then, there will always be the lottery of finding out where on the “yes we can do business with them” scale the opposing party’s lawyer falls.

At one end of the scale are the lawyers and firms (it is often a cultural thing in firms) who are genuine commercial litigators.  Always a relief to see their notepaper drop on the desk or their logo into the inbox.

On the other end of the scale are the mad, the bad and the dangerous to know.  Litigators who seem to operate in a vacuum without regard to the commercial context or the real interests of their clients.   A dread day for both lawyer and client when their notepaper wings it way across.

The moral of this article is simple.  Choose your lawyer wisely and be aware that the best advice you get might not be the advice you want to hear.