Few small or medium size businesses operate to the letter of their Articles of Association (”Articles”). This is not that surprising given the technical language and complexity of many of these documents. Even where the directors and shareholders are aware of the terms of the Articles the requirements can seem technical and have little relationship to the day to day business of making money. Because of this the Articles are more often observed in the breach. Most of the time companies get away with this relaxed approach but in the event of a shareholders dispute or a dispute between shareholders and directors then the first thing a lawyer is likely to do is get hold of a copy of the Articles and digest the contents. This can lead to some unpleasant surprises.
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A company’s accountants and auditors often play a key role in the business of smaller companies, acting as general advisers to the directors. This can lead to problems in the event of a shareholder dispute or boardoom battle.
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A derivative action is one where a shareholder takes legal action on behalf of the company. This goes against the general rule that the affairs of the company are managed by the directors. The reason for this remedy to is to provide a mechanism for redress where, for example, directors refuse to act (particularly where they are the wrongdoers).
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.
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If you are involved in a shareholders dispute there can be a temptation to do nothing and hope that it all blows over. Sometimes this is just what happens and it is the right thing to do. However, a failure to grasp the nettle can also have unfortunate consequences. You might find that your shareholders rights have been significantly diminished by a delay in taking action.
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In any shareholders dispute one of the first questions that will occur to a lawyer is how much are you arguing about. However, it is surprising how often this has not been addressed by parties to a dispute.
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.
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One clear way to improve your position in a shareholders dispute is to act early and act fast. It is often the case that lawyers are called in too late, when early intervention could have made a real difference.
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In an article in the FT Michael Kavanagh discusses the current challenges facing non-executive directors (with a few quotes from yours truly).
Click here to read the article.
When you specialise in dealing with shareholders disputes you become more of a commercial divorce lawyer than a commercial litigator. The passions that can be aroused in a dispute between the shareholders in a business are as intense as those which my colleagues in the family law sphere are used to dealing with. How to avoid these passions killing the golden goose in boardroom disputes is a perennial problem.
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Marks & Spencer, which has suffered a spate of boardroom battles over the years, continues to provide examples of institutional shareholders attempting to exert control.
The latest shareholder intervention occurred at the recent AGM of the company when a group of institutional shareholders lead by local government pension funds sought to bring forward the appointment of an independent chairman. Currently Sir Stuart Rose occupies both the roles of chief executive and chairman which on the face of it is a deviation from the corporate governance code promulgated by the Financial Reporting Council.
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Boardroom disputes and shareholders disputes always have the potential to seriously damage the company in question. One particular problem, particularly in the current financial climate, is that banks may use a dispute as a reason to terminate or curtail a companies banking facilities. The problems can be even worse for listed companies.
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Corporate Governance, Shareholders disputes | Ed Weeks | 
August 23, 2010 11:20 am | 
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