Shareholder disputes are an unavoidable feature of corporate life!

Types of Shareholder Disputes

Shareholder disputes encompass a wide range of disputes for example:

• Derivative actions brought by a shareholder(s) on behalf of the company. These can include claims against a director(s) for breach of their fiduciary duties and duties under the Companies Act 2006 (for example the duty to promote the success of the company (section 172)) or against a third party for a wrongdoing such as breach of contract and/or negligence.
• Unfair prejudice petitions brought by a shareholder against other shareholders or directors in relation to conduct that unfairly prejudices the petitioner’s own interest as shareholder (for example the dilution of share value by issuing further shares without the appropriate resolutions).
• Disputes between shareholders in relation to valuation of the company.
• Disputes between shareholders in relation to a breach by a shareholder(s) of their obligation(s) under a shareholder agreement.

ADR

While the traditional route for resolving these disputes has been via litigation in the Courts, in recent years, there has been a marked shift towards Alternative Dispute Resolution (“ADR”) as a preferred mechanism for resolving shareholder disputes.

ADR is an umbrella term comprising various dispute resolution processes including negotiation, mediation, arbitration, adjudication (applicable to most UK construction contracts) and early neutral evaluation.  The most common forms of ADR utilised in Northern Ireland are mediation and negotiation.

Benefits of ADR in the context of shareholder disputes

While all types are distinct, ADR generally presents a more cost effective, flexible, confidential and more efficient means of resolving shareholder disputes.

Given that ADR is less adversarial than Court proceedings, this is particularly valuable in the context of shareholder disputes where the parties may have long-standing business or personal relationships which they wish to preserve.  Indeed, in Northern Ireland 92% of businesses are family owned.  This close interplay between personal relationships and business interests provides a fertile breeding ground for disputes.

The fact that ADR is generally confidential is also highly beneficial as it avoids any potential reputational damage to the company and the exposure of commercially sensitive information.

ADR offer the parties more control and flexibility in the process and outcome as there are no one-size fits all and the parties can input into any terms of settlement unlike the determination of a Judge.

Furthermore, ADR can offer a much more time and cost-efficient means of resolving disputes thereby minimising disruption to the company and allowing the company to focus on its growth.

The Court’s Attitude to ADR

It is clearly established that the Courts are strongly encouraging parties to engage in ADR.

In the case of Halsey –v Milton Keynes [2004] EWCA Civ 576 the Court of Appeal set down the precedent that the Court can depart from the general rule that the unsuccessful party pays the costs of the successful party where it can be shown that the successful party has acted unreasonably in refusing to agree to ADR.

In 2011 in the Court of Appeal case of Rolf v De Guerin [2011] EWCA Civ 78 the Court held that a party’s unreasonable failure to engage in settlement negotiations or mediation ought to bear materially on the Court’s exercise of its discretion when determining costs.

In the Court of Appeal case of Churchill v Merthyr Tydfil Borough Council [2023] EWCA Civ 1416 the Court went further.  It confirmed that the Court has the power to actively order parties to engage in alternative forms of dispute resolution without obstructing their right to a fair and public hearing under Article 6 of the European Convention on Human Rights (“ECHR”).

In recent authorities of the High Court in Northern Ireland the Court observed that litigation is unfortunate and should be viewed as a last resort by all concerned, such that an appropriate form of mediation is to be “strongly exhorted” (Lipsett v. AIB [2020] NIQB 5).

Moreover, the Court of Appeal in Northern Ireland expounded that the possibility of a mediated solution should be “earnestly considered: it is not too late to effect some reduction in legal costs, anxiety and uncertainty” (Kerr v. Jamison [2019] NICA 48).

Considering the case law, it is clear that parties must give serious consideration to ADR and if they chose not to engage in ADR, they must have good grounds for doing so. Otherwise, they risk facing adverse cost orders.

Conclusion

If you are experiencing or anticipating a shareholder dispute, please contact the Commercial Dispute Resolution Team at Millar McCall Wylie, who will be able to provide you with strategic advice on the options available to you.