Shareholder battles - between the 'Rock' and a hard place

16 January 2009



Shareholder disputes have made the news recently: the Northern Rock shareholders have challenged the government's valuation of the recently nationalised bank, which left the shareholders with nothing, in the administrative courts.

Although the outcome of that case is expected shortly, shareholder disputes are nothing new and have been battled through the Courts of Equity for centuries. The basic principles and how to deal with this type of dispute was finally included in the Companies Act 1948 and now appears at s994 of the Companies Act 2006. The government's nationalisation of Northern Rock is not a usual shareholder dispute which is why the shareholders' challenge is using European and Human Rights legislation.

A company is usually run for the benefit of its shareholders, although if times are tough and insolvency looms a company must be run for the benefit of its creditors.

Shareholders reach agreements between themselves on how the company should be run and what involvement they each will have. Often some or all of this decision is documented in a shareholders' agreement or the articles of association – sometimes in smaller companies it is an unspoken agreement based on the principles of partnership.

If a shareholder believes that the other shareholders (who are often directors as well) are conducting the business in a manner that is detrimental to his interests then he may have a claim against them.

Commonly cited complaints include:

• over payment of one director (or shareholder) in preference to the others;

• using Company assets for their own benefit or stripping the Company of assets without permission; and

• exclusion from management.

If the Court agrees that these shareholders have acted to the detriment of the other shareholders the outcome of the Court case will be that one group buys out the other. In some rare circumstances, the Company is wound up on what is termed "the just and equitable basis" and the proceeds distributed between the shareholders once the creditors have been paid.

It is for good reason that this sort of case is referred to as a "corporate divorce".

Unravelling what has happened in a Company can be a long and tangled investigation, involving lawyers and accountants. However, when the other option is to sit back and watch your investment in a company dwindle to nothing by the actions of your fellow shareholders, corporate divorce is sometimes the only way out.

On the Northern Rock front, the shareholders have discovered that the Government's accountants were instructed to value the bank on the basis of it being in administration and not as a going concern. Naturally, this valued their shares as worthless. The shareholders argue that Northern Rock had many valuable assets and that its short-term liquidity problem should not devalue them. If the shareholders win, the Government could face a large bill paying them off and the reassessment of their compensation scheme.

Matthew Brandis, partner in the litigation and dispute resolution team, comments: "the Companies Court is currently overwhelmed with this type of case with case law developing at a rapid rate.

"For example, our recent experience before the Court of Appeal in Oxford Legal Group Ltd v Sibbasbridge Services Plc clarified a complex area of law about when companies have to disclose financial information to directors who were involved in a shareholder dispute. That said, we have a solid reputation for settling this type of complex dispute before reaching the doors of the Court.

"In our experience, this sort of dispute can be resolved quickly if the shareholders have documented their agreements on how the company should be run and have a mechanism of dispute resolution if things go wrong. Although at the start of a business relationship a client never anticipates anything will go wrong a carefully drafted shareholders' agreement and articles is a really worthwhile investment when a corporate divorce looms."