When shareholders fall out: options, and what to agree first

Businesses started between people who know each other rarely document anything at the outset — it seems unnecessary and slightly insulting. What exists is a standard set of articles filed to satisfy the registrar, which says nothing about what was actually agreed.

The problem surfaces when one partner stops working in the business but keeps the same shareholding; when someone wants out and no price can be agreed; when one director stops the other seeing the accounts; or when a fifty-fifty split deadlocks and the business cannot move.

At that point what decides it is the articles and the minutes on record, not what the parties remember agreeing.

What rights does a shareholder already have?

• To inspect the company's books and records as the law provides — the starting point in most matters, since disputes usually begin with not being shown the numbers.
• To require a shareholders' meeting, with the requisite holding.
• To ask the court to set aside resolutions passed contrary to law or the articles.
• To sue directors for loss caused to the company.
• To ask the court to wind the company up where it can no longer function — a last resort that usually destroys value.

What should you do first when a dispute starts?

• Request the records in writing first, both to prove the request and to learn the real position before deciding anything.
• Review the articles and the past minutes to see whether things were in fact done properly.
• Negotiate a buy-out, agreeing the valuation method before arguing about the number — usually the least destructive outcome for everyone.
• If that fails, use the court remedy that fits the actual problem, rather than bringing every claim at once.

What should you agree on day one?

These go in the articles and in a shareholders' agreement. They take little time while everyone still agrees, and save a great deal once they do not.

• Who does what, what they are paid for it, and whether stopping affects their shareholding.
• Which decisions need unanimity rather than a majority — borrowing, selling a principal asset, admitting a new shareholder.
• Whether a seller must offer to the others first, and the method for valuing the shares — the method, fixed in advance, not a number.
• When dividends are paid and how much profit stays in the business.
• How a deadlock is broken — for example, one side names a price and the other chooses whether to buy or sell at it.
• Whether a deceased shareholder's heirs take their place.

What should you never do?

• An equal fifty-fifty split with no deadlock mechanism, where disagreement means nobody can decide anything.
• Cutting the other side off from information, which brings the matter to court faster.
• Taking money out without recording it properly, which becomes an issue in the case.
• Holding meetings without proper notice, so the resolutions can be set aside later.

This page is general information, not advice on your company. Bring the company certificate, the articles and the minutes for review.