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23 September 2016

Shareholder disputes

The challenges faced by pharmacy such as rising customer expectations can lead to tension between directors, shareholders and employees. Clear rules regarding corporate governance are needed. Stephen Burns and Katie Bewick report...

Disputes often arise because of a breakdown in communications and disputes between those individuals. Disputes can be avoided by thinking ahead on the formation of the business through a shareholders' agreement and/or well drafted company's articles of association.

However in reality this does not always happen when it should and businesses can find themselves in difficult situations when a dispute arises. As a shareholder, knowing your legal rights at the outset and how to handle internal disputes is imperative.

The role of directors and shareholders

A shareholder director has two separate roles in a business; one of shareholder and one of director. Care needs to be taken to ensure that a director who is also a shareholder continues to discharge their duties as a director even in the event of a dispute between himself and another shareholder.

All directors (whether a shareholder or not) have duties to the company to promote its success and avoid conflicts of interest.

Where a director is in breach of duty, it may be possible for an aggrieved shareholder to bring a derivative action against them. The shareholder bringing the derivative action 'stands in the shoes' of the company to bring a claim against the director in question.

Smaller businesses may be run as a 'quasi-partnership' where business relationships and management roles evolve over time.

A quasi-partnership can be created when individuals decide to go into business together and agree to jointly manage and share the risk of the business.

In these situations, it may be possible for a minority shareholder to show that certain equitable understandings in the form of legitimate expectation have been breached, for example that they would be involved in the management of the business, that may give rise to a cause of action under s.994 of the Companies Act 2006 even if this is not documented within a legally binding document. In such cases a court may order for the majority to buy out the minority.

Documenting shareholders' rights

It is important to document as soon as possible the rights of each shareholder. Such transparency will help to prevent any potential disputes at a later stage and will save time and cost in doing so.

A shareholders' agreement is recommended. It will document the roles of those involved, their responsibilities and how the business should be conducted.

It is also important to understand the difference between a shareholder, director or employee. For example, a shareholder and/or director who work in the business may also be an employee even if there is no written contract of employment.

Unfortunately it is quite common that agreements are not in place. If this is the case, then the Companies Act 2006 and default Articles do not always tell the full story.

Although the starting point is that the business through its directors runs the company, a simple majority of shareholders (i.e. 50%) has control and can remove a director from office. However that majority power cannot be used in bad faith in a discriminatory way which unfairly prejudices the interests of the minority.

How to manage a dispute if it does arise

Disputes between shareholders can be complex and in order to investigate the situation, consideration should be given to all the relevant documents and background.

It is for this reason that it is important to seek advice at an early stage, particularly in the event that the situation cannot be resolved through the board or by a shareholders' resolution.

This article was written by Stephen Burns and Katie Bewick. For more information please contact Stephen on +44 (0)1483 252 618 or or contact Katie on (0)1483 252 618 or

This article was originally published by Pharmacy Business on 22nd September 2016