Partner Article

Breakdown of Litigation: Director and shareholder disputes

Commercial litigation has many different branches that a solicitor trained in this area of the law will be able to handle. However, the issue of director and shareholder disputes can be both confusing and difficult to handle.

Director and shareholder disputes can be very damaging to a business unless they are resolved as soon as possible, as they can cause the company to spilt down the middle due to the opposing opinions of those in charge.

The Companies Act 2006 clearly sets out the directors’ and shareholders duties, along with advice on how to prevent disputes from happening in the first place. However, it isn’t always possible to do this.

Why do director and shareholder disputes occur?

Some of the most common causes for these disputes can include:

Director disputes

- Fighting for increased power within the company

- Conflicts of interest, such as a director working closely with a private business which they own.

- The possibility of insolvency.

- Uncovering illegal dealings (such as fraud) perpetrated by the other directors.

For shareholders

- Shareholders being unhappy with the level of dividends paid to them from the company.

- The difference between time contributed to the company - shareholders can feel unhappy that other shareholders aren’t devoting enough time to the company.

- The cost of buying out another shareholder.

- Minority shareholders feeling that their rights have been impinged.

Knowing when to take disputes to court

Before considering legal action, directors and shareholders should always attempt to repair their problems with mediation or arbitration first.

How can this be done?

Going to court can be expensive and could take much longer than either party expects. This is why mediation or arbitration should always be attempted beforehand.

Mediation is the act of attempting to come to a settlement that suits both sides without having to go to court. Mediation can commence with a third party trained in Alternative Dispute Resolution (ADR) coming in to assist. However, mediation doesn’t always work, as parties may not be able to agree on a suitable outcome. In this case, a trial may be the only option.

How long do trials take?

This is entirely dependent upon the individual case. Some cases can take weeks or even months to complete and can cost much more than expected, whereas others can take just a few days and can be very reasonably priced.

Is going to trial the best option?

If mediation has failed, going to court could be the only option left.

However, before making such an important decision, shareholders or directors should properly consider the strength of their case.

For instance, bringing a case against a company that is on the brink of insolvency would essentially be useless, as even if the case was won the company wouldn’t be able to meet the demands of the judge. One of the best ways to find out whether a case is strong enough to win in court is to present it to a solicitor, who will be able to pinpoint its strengths and weaknesses.

What happens when companies can’t afford to go to court?

If a company doesn’t have the funds available for mediation, arbitration or a court case, they can apply for litigation funding. This is a kind of loan which can cover the cost of legal disputes. In most cases, they are paid on a ‘no win no fee’ basis. If the case was to be successful though, the litigation funding company would detract its fees from the settlement amount.

Shareholder and director disputes can be very damaging to companies, as it usually means the company takes its eye off the ball for the duration. Resolving the issue as quickly as possible is always preferable.

This article was provided on behalf of Vannin Capital, a specialist litigation funding company working throughout the UK, USA, EU and Caribbean jurisdictions.

This was posted in Bdaily's Members' News section by Jake Hall .