Falling out over Finances, Episode 1: Shareholder Strife
In this episode, we focus on the area of dispute which impacts SMEs and owner managed businesses.
When disagreements exist over operational decisions or commercial issues, or even personal differences, unresolved problems can have a significant impact on the future trading of a business and its long term success. Deadlock is reached between the shareholders when sensible negotiation fails and matters cannot be resolved informally.
This scenario is prevalent where businesses are small with few key members of management staff. Often this is the case when business owners are family or have a close personal relationship.
Tait Walker Forensic Services have dealt with several cases where relationships are irreconcilable and shareholders have exited a business. In such circumstances, the loss of key personnel may significantly affect a business’ ability to trade. It may lead to rapid deterioration in income or profitability, perhaps permanently.
The Shareholder Agreement is the first line of defence in a dispute. It sets out the entitlement of each party and their rights in respect of their shareholdings.
Some shareholder contracts are very basic. However, robust agreements prescribe the action to be taken in the event of a deadlock. It may dictate a sale or transfer of share ownership, providing detailed terms of such a transfer.
The shareholders’ agreement to the initial contract supersedes any disagreement they may have with one another. It therefore allows a conclusion to the matter, as even if the action of selling shares is undesirable, it may be the only feasible outcome to reach a resolution.
An expert valuation is often required in a deadlock situation to accurately and fully value a business and its shares. Tait Walker’s Forensic Services team have provided business and share valuations for entities to facilitate a transfer of shares/exit strategy and assist in an equitable settlement being reached. We can provide an expert valuation with or without a shareholder agreement. However, the presence of the agreement suggests a fairer settlement as it is a considered method of settlement which was agreed prior to the dispute.
In the absence of a contract, it is possible to draw up an interim agreement with the assistance of legal advisors to reach a solution. This removes any barriers to the continued trading of a business whilst the dispute is ongoing, thereby avoiding trading losses.
An interim agreement would not resolve all issues in dispute immediately. However, it offers a degree of assurance to company shareholders and creditors that the business can still operate effectively and prevent any further losses sustained.
If a shareholder commences Court proceedings in respect of a dispute, then control is removed from the hands of the disputing parties, where Court may enforce the sale or buyback of shares or even the Liquidation of a company, to the detriment of shareholders and creditors.
The costs of Court involvement are high and may be avoided by having a resilient, fair shareholder agreement in place. We strongly recommend business owners implement a bespoke shareholder agreement if one does not already exist. We also recommend reviewing the one in place to ensure it is still relevant and fair for all parties involved.
The shareholder agreement should be consulted and updated to ensure all shareholders’ interests are protected equitably.
Our Forensic Services team deals with all aspects of Estate management and taxation, including liaising with third parties to report on personal tax implications.
Please contact our Forensic specialists on 0191 285 0321 to discuss further.
Next Week’s Episode….
Another instance where a lack of a formalised agreement can lead to financial distress is in partnership disputes. Next Friday in Episode 2 ‘Partnership Problems’, we navigate the repercussions of informal longstanding relationships and trust between partners, what happens when they terminate, and the problems posed by quasi partnerships.