Wed 27 Feb 2019

The shareholder dispute that never was (but should have been)

Over the years I've seen more than my fair share of shareholder disputes and I've often been evangelical about how to avoid them (put simply, make sure you have a proper shareholders’ agreement if you have a company that has two or more shareholders).

A shareholders' agreement can be quite straightforward, but if you have a 50/50 company it needs to contain a mechanism for resolving deadlocks. The simplest mechanism is to agree that a third party will impose a binding solution on the warring factions, and I’ve seen such clauses used successfully on a number of occasions.

However, I recently came across a shareholder dispute that isn’t actually a shareholder dispute (but should have been) because one of the shareholders doesn’t have any shares (but should have done). In a nutshell, two individuals, A and B, with complementary skills agreed to form a 50/50 company to generate a new income stream for themselves. Life was good: B bought a shiny new shelf company, transferred the one existing share to himself, appointed himself and A as directors; they both lent equal amounts of money to the company to fund their start-up and off they went. The one thing they never got round to doing was allotting a share to A, even though that was the very clear intention, so the supposedly 50/50 company was (and still is) owned 100% by B. I seem to spend half my life imploring company owners to file the correct paperwork with Companies House and write up the company’s statutory books (which is unfortunately not an exciting task), and this sorry tale demonstrates exactly why the boring paperwork should be completed. Even if A and B had never got round to signing a proper shareholders’ agreement, A would at least have had some clout if some very simple paperwork had been completed to allot one share to him. As it is, B has decided to ‘go it alone’ now that he and A have done the difficult and time-consuming groundwork for the new venture, he’s called a formal shareholders’ meeting (with himself) to remove A as a director (which B is entitled to do) and A is being cut out of the deal altogether. For B to remove A as a director, B simply needs to be able pass a simple majority shareholder resolution: I’m no mathematician but even I can see that that’s easy for a 100% shareholder but impossible for a 50% shareholder.

Without going in to all of the detail, suffice it to say that A’s position isn’t necessarily a lost cause, but it would have been so much easier for him if he had a share in the company.

Back in December 2018 I blogged about treating the shares in your company as if they were the Crown Jewels and not giving them away lightly. The corollary of that story is that if someone intends to give you shares in a company, make sure the paperwork is all written up correctly to get the shares into your hands. I'm certainly not advocating anyone having a shareholders' dispute: it’s difficult enough advising on shareholder disputes at the best of times, but you don't want the added disadvantage of not even being a shareholder. That really is fighting with one arm tied behind your back. 

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