Being frozen out of a company you helped to build can be both frustrating and financially damaging. You may suddenly find yourself excluded from important meetings, denied access to financial information, removed from day-to-day decision-making or simply ignored when major business decisions are being made.
If you are a shareholder in an Irish company and your business partner or fellow shareholders are attempting to exclude you from the business, you may have legal options.
A breakdown in the relationship between business partners can give rise to a shareholder dispute and, in certain circumstances, the conduct involved may amount to oppression of a shareholder under Irish company law.
The appropriate response will depend on your shareholding, whether you are also a director or employee, the company’s constitution, any shareholders’ agreement and, importantly, exactly what the other shareholders have done.
There is no single legal definition of being “frozen out”. In practice, shareholder disputes frequently involve allegations that one shareholder or group of shareholders has deliberately excluded another shareholder from the company’s affairs.
Examples can include:
Not every disagreement or exclusion will constitute unlawful conduct. The legal position needs to be considered in the context of the company’s constitution, any shareholders’ agreement, the Companies Act 2014 and the particular history of the business relationship.
Owning shares does not necessarily give a shareholder a right to participate in the day-to-day management of a company. This is an important distinction.
A company is generally managed by its directors. A person can be a shareholder without being a director, and the rights attaching to those two positions are different.
However, a shareholder has rights arising from the company’s constitution, the Companies Act 2014 and, where one exists, a shareholders’ agreement.
The position can become particularly contentious where two people established a business together on the understanding that they would both participate in its management, but one subsequently attempts to exclude the other.
This is one reason why the background to the company and the agreements reached between the parties can be extremely important in a shareholder dispute.
One of the first documents to examine is the shareholders’ agreement.
A properly drafted shareholders’ agreement may regulate matters such as:
If your business partner has acted contrary to the shareholders’ agreement, you may potentially have a contractual claim.
The agreement may also provide a mechanism for resolving the dispute without court proceedings.
The absence of a shareholders’ agreement does not mean that a shareholder has no rights.
Your company’s constitution and the provisions of the Companies Act 2014 remain relevant.
Depending on the circumstances, a shareholder who has been unfairly excluded may also be able to seek relief from the Irish courts.
This is particularly important in owner-managed companies where the shareholders may have operated the business for years without putting a formal shareholders’ agreement in place.
One of the most important remedies available in serious Irish shareholder disputes is contained in Section 212 of the Companies Act 2014.
Broadly speaking, Section 212 allows a member of a company to apply to court where the affairs of the company are being conducted, or the powers of the directors are being exercised, in a manner oppressive to them or another member, or in disregard of their interests as members.
Whether particular conduct amounts to oppression or disregard of a shareholder’s interests is highly fact-specific.
Being excluded from the management of a company does not automatically establish a Section 212 claim. However, exclusion can potentially form part of a wider pattern of conduct relevant to an oppression claim.
For example, a court may need to consider the nature of the business relationship, the expectations and agreements between the shareholders, how the company was historically operated and the financial consequences of the conduct complained of.
The court has significant powers where a claim under Section 212 is established.
Depending on the circumstances, the court may make orders regulating how the company’s affairs are to be conducted or requiring one party to purchase another party’s shares.
A shareholder buyout can be particularly important where the relationship between the shareholders has broken down beyond repair.
However, the value at which shares should be purchased can itself become a significant area of dispute.
Questions can arise regarding the appropriate valuation date, the company’s underlying value and whether a minority discount should apply. Specialist valuation evidence may therefore be required in substantial shareholder disputes.
A shareholder and a director are legally distinct roles.
It may therefore be possible for somebody to cease being a director while continuing to own shares in the company.
The removal of a director is governed by Irish company law and any relevant contractual arrangements. It is important to examine whether the proper procedure has been followed and whether removal also has consequences under a shareholders’ agreement, employment contract or other agreement.
If you have been threatened with removal as a director, obtaining advice before meetings or resolutions take place can be particularly important.
A 50/50 shareholder dispute presents particular difficulties.
Where two shareholders each own 50% of a company and their relationship breaks down, the company can become deadlocked. Neither shareholder may have sufficient voting power to make certain decisions without the other.
A well-drafted shareholders’ agreement should contain a deadlock mechanism dealing with this possibility.
Where there is no effective deadlock provision, negotiations may be required to agree a buyout or other separation. If agreement cannot be reached, litigation may ultimately become necessary depending on the circumstances.
Simply owning 50% of the company does not mean that the other 50% shareholder can necessarily remove you from the company or force you to sell your shares.
Whether you can be required to sell your shares depends on the company’s constitution, any shareholders’ agreement and the circumstances surrounding the proposed transfer.
Shareholders’ agreements sometimes contain compulsory transfer provisions, including good leaver and bad leaver clauses, which can require shares to be offered for sale following specified events.
There may also be drag-along provisions in connection with a sale of the company.
However, a fellow shareholder cannot simply decide that you no longer own your shares because the business relationship has deteriorated.
If you are being pressured to transfer your shares, particularly at a price you believe is substantially below their true value, you should obtain independent legal advice before signing anything.
When a shareholder dispute becomes personal, there can be considerable pressure to act immediately.
You might be told to resign as a director, accept a payment for your shares, sign a settlement agreement or simply walk away from the company.
These decisions can have significant legal and financial consequences.
Before agreeing to anything, it is important to establish:
The appropriate strategy for somebody who wants to remain involved in the business may be very different from that of a shareholder who wants to negotiate an exit at a fair value.
If you believe another shareholder is attempting to freeze you out of the company, preserve relevant records.
This can include correspondence between the shareholders, board papers, shareholder meeting notices, financial information, copies of agreements and communications concerning decisions from which you have been excluded.
Do not improperly access, remove or copy confidential company information to which you are not entitled. The appropriate steps will depend on your position as shareholder, director and/or employee.
Early legal advice can help identify what evidence is relevant and what information you are legally entitled to obtain.
Yes.
Court proceedings are sometimes necessary, particularly where urgent intervention is required or the parties’ positions are fundamentally incompatible. However, shareholder litigation can be expensive, time-consuming and disruptive to the underlying business.
Many business partner disputes and shareholder disputes are ultimately resolved through negotiation or mediation.
Possible outcomes can include:
The commercial objective should be considered alongside the legal position. In many cases, the real question is not simply who is legally right, but whether there is a commercially sensible way of allowing the business and its shareholders to move forward.
If your business partner is freezing you out of a company, it is important to obtain advice at an early stage.
Actions taken during the initial stages of a dispute including resigning as a director, transferring shares, agreeing a valuation or sending communications to other shareholders can significantly affect what happens next.
Sherwin O’Riordan Solicitors advises shareholders, directors and companies in relation to shareholder disputes, minority shareholder rights, shareholder oppression, Section 212 Companies Act 2014 claims, 50/50 shareholder deadlocks and disputes concerning shareholders’ agreements.
If you are involved in a dispute with a business partner or fellow shareholder, contact our team to discuss your position and the options available to you.
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