Steps for dealing with minority shareholder disputes

Introduction

Below are some basic steps and guidelines for minority shareholders of Irish companies who believe that the conduct of the majority shareholders is unfair or oppressive. These guidelines were prepared based on our experience of such cases in companies of various sizes and involving a wide range of disputes. Some of these disputes can be resolved quickly, others may go to formal mediation and a small number resort to litigation.

Step 1: Raise the matter with the company

It may sound trite but it is imperative to raise the matter with the company and its directors at the earliest opportunity. This is an important first step not only because it may resolve the issue but also because it prevents the company from successfully arguing at a later stage – such as in court proceedings – that you "acquiesced" to the oppressive conduct. Your concerns should be raised in the first instance by way of a formal letter to the company's directors setting out exactly what the issue is and how you would like for it to be resolved.

Step 2: Attend formal meetings

This should include the company's AGM where you will have an opportunity to ask questions and raise your concerns about the company's oppressive conduct. It is likely that other shareholders will share some or all of those concerns and they will back you up at the general meeting. The company directors may also invite you to meet with them to discuss the matter privately. You should attend those meetings even if you think it will achieve nothing. If relationships with the directors have broken down, ask someone else to attend the meeting with you.

Step 3: Keep written records

Communications with the company and its directors should be in writing and you should maintain records of every event. For example, the company is required to take Minutes of every AGM. You, as a member of the company, are entitled to copies of the Minutes so make sure to request them. Do not delete your emails and text messages from the directors, both in relation to the oppressive conduct itself and your subsequent complaint about it. You are essentially gathering evidence which may be used later if the matter reaches a more formal dispute resolution environment, including litigation.

Step 4: Act in good faith and avoid retaliation

Try and avoid the urge to retaliate or punish the other shareholders for their oppressive conduct. Retaliation happens most commonly in situations where there are only two shareholders and they each own 50 per cent of the company. Where one shareholder feels aggrieved or oppressed, he/she will try and out-do the other with similarly oppressive conduct. Although that may well be human nature, it only serves to further damage relations and effectively cripples the company. Moreover, it may become a major obstacle in seeking redress under the minority shareholder provisions contained in the Companies Act 2014. The remedies provided by the Act are equitable in nature and therefore require an applicant to "come to court with clean hands" (although in practice the courts have been prepared to overlook some level of retaliation as long as it was not done in bad faith).

Step 5: Know your rights

You have certain rights and protections as a minority shareholder of the company. These are contained in the Companies Act 2014 and may be supplemented (or indeed limited) by the company's constitution and/or a shareholder agreement. If you are an employee of the company, you will have additional rights and remedies under employment legislation. In the context of company law, your rights may be enforced in a number of ways, normally requiring a court application under various provisions of the legislation. For example, if the company refuses to provide you with copies of the Minutes from the AGM, you can apply to the court pursuant to section 217(4) of the Companies Act 2014 compelling it to do so. But by far the most common remedy relied upon by minority shareholders is contained in section 212 of the Companies Act 2014 which provides for an application by a minority shareholder (including a 50% shareholder) to the High Court seeking relief for the company's oppressive conduct or conduct which is in disregard of his/her interests as a member.

Step 6: Seek legal advice

While it is desirable – and indeed necessary – to attempt to resolve the shareholder dispute yourself, the sad reality is that most relationships in these situations will have broken down to the point where this is practically impossible. Then it becomes necessary to seek legal advice and representation. Since this is a specialist and highly complex area of law, you should either instruct a lawyer specialising in minority shareholder remedies or else instruct your lawyer to forward the matter to a specialist. Your lawyer will advise you on the best way to proceed.

Step 7: Alternative dispute resolution

In most cases, your lawyer will recommend ADR, an attempt to resolve the matter by way of mediation. In our experience, this is highly effective because it can save the client considerable time, stress and money that would otherwise arise from litigation. Not only does engaging in mediation resolve disputes in a significant number of cases, it is a positive requirement under Irish law. Before engaging in mediation, it is important to know: the strength of your case if it went to litigation, what you are prepared to accept by way of remedy and what you are prepared to concede by way of compromise.

Step 8: Litigation

Issuing court proceedings should always be the last resort. While it can be highly effective and make the problem go away (or at least cause the other party to make serious concessions in negotiations), It is not without risk. Litigation is recommended in a case which Is extremely strong; in other words, it is very likely to succeed. It is for this reason that you should obtain Counsel's Opinion prior to deciding whether or not to issue proceedings. Indeed, such an Opinion should be obtained prior to engaging in mediation since it is important to know the strength of your case before agreeing to accept or concede anything. Apart from minority oppression proceedings under section 212, you may also be entitled to bring other claims such as claims for unfair dismissal, breach of contract etc. The availability of these claim and the likelihood of their success depends entirely on the specific facts of your case.

Author: Mahmud Samad BL
Publication date: 2nd June 2023

CORPORATELEGAL