Shareholder Dispute Resolutions
Why shareholders have dispute? Here are five common causes of typical types of shareholder disputes:
- Breach of the Shareholder Agreement
- Disagreements Over Direction
- Fiduciary Misdeeds
- Minority Shareholders Getting No Respect
- Differences in Compensation or Contribution
There are many options and strategies to shareholders dispute resolutions.
Studying the company’s constitutional documents, its articles of association and any shareholders agreement which govern the company and the shareholders, is the starting point to solve the dispute. Such articles or agreement should include several provisions that can assist with resolving dispute.
Negotiation most likely is the cost effective and amicable way to solve the dispute.
For the sake of keeping relationships as cordial as possible and reducing the likelihood of getting involved in costly and time consuming legal action, dispute parties aim to negotiate a feasible solution which is acceptable by both parties.
Due to lack of legal knowledge, each party may engage a lawyer or legal advisor as their representative during the course of negotiation.
Ideally, a solution can be reached which enables the aggrieved shareholder to stay with the company.
Buy out by one of the parties
Either one disputing party can buy the shares held by the other party and in most cases an existing shareholder in the company will be the most motivated to buy out another party’s shares. Under the circumstance of unfair prejudice minority shareholder actions, the courts are keen to encourage settlement by offering the “aggrieved shareholder” a reasonable price offered by the other party to buy out the opposite side’s shares in the company.
In order to help agree on what price a shareholder should be bought out at, it is always a good idea to instruct an independent valuation accountant who specialises in valuing companies in your industry. After setting certain criteria that should be considered, the parties in dispute can agree to adhere to whatever valuation is produced and complete a transaction based on that figure.
Sale of the whole company
In the circumstance that both parties cannot accept the opposite side’s proposal of buy out, selling the whole business to external party is a feasible option. Such method is most suitable those due to their relationship having eventually broken down irretrievably after years of disagreements, and disappearance of mutual trust.
Dissolution by winding up
Under S.177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong, a company may be wound up by the court if “the court is of opinion that it is just and equitable that the company should be wound up”.
A shareholder is entitled to apply for such a winding up where they have a sufficient interest in the winding up.
There is no easy definition of what circumstances make it “just and equitable” for a court to wind up a company. Each case is looked at on its own merits.
Situations where winding up orders have been made include where:
- a minority shareholder was wrongly excluded from management;
- the majority shareholders have consistently ignored the rights of the minority;
- the directors have awarded themselves excessive remuneration whilst refusing to pay dividends to shareholders;
- there is deadlock within the company and no decisions are capable of being made.