I have recently acted in a number of SME (small to medium size
enterprises) shareholder disputes requiring my disputes and
insolvency expertise. These disputes came about as result of
diminishing profits and the financial pressures then faced by the
directors. I have seen many other triggers cause a serious
breakdown of trust between SME owners and a consequent dispute or
The disputes have included allegations of a majority shareholder
unfairly earning too much, a shareholder simply wanting to retire
or wind down their involvement and a breach of duty by one
director. Once trust has been lost between directors or
shareholders, the dispute can quickly become too difficult to
settle. A useful tool for helping to prevent these disputes, or to
aide their quicker resolution, is to start the relationship with a
bespoke shareholders agreement, negotiated after independent
advice. This is even more advisable when one of the shareholders
will be a minority and/or not work in the business. Most
shareholder disputes I have been involved in have lacked such an
It surprises me that some shareholders are reluctant to spend
the costs required to each obtain independent objective accounting
and legal advice on the SME structure, including on shareholder
agreement terms. SME shareholders sometimes just rely on basic
shelf company constitutions, without considering any amendments.
That is a naive way to start a business relationships – with
no tailored rules.
Some key matters a shareholders agreement can address are:
Access to company records/accounts and a possible right to
Right to attend management meetings/ have board
Triggers to a solvent winding up
Level of funding obligations and the security each might
provide in support
Share buyout triggers and the share valuation method
Ownership of any introduced assets
Limits on directors authority to contract/ borrow etc without
unanimous shareholder approval
Key employment terms for the GM
Vote deadlock breaking mechanisms
Pre-emptive share purchase rights
Pre-agreed restraints on departing directors/shareholders
These examples seem to be obvious matters that SME shareholders
should discuss and agree at the start of their relationship. Once
they are in dispute, it is too late.
Whilst many shareholder disputes can be negotiated to a
resolution, such as via a buyout, the delay and costs in that
process will usually substantially exceed the costs of negotiating
a shareholders agreement at the outset. Business goodwill also
suffers in the interim. A deadlock can also ruin the business.
There are court remedies available when negotiations fail, such
A suit by a minority to avoid their oppression; or,
A just and equitable winding up.
These are public, costly and the results can be uncertain.
At Surry Partners, we are regularly involved in helping SME
promoters structure their affairs or in assisting to resolve
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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