Alternative Dispute Resolution Sees £500,000 Awarded In Shareholder Dispute
The importance of exploring methods of alternative dispute resolution was recently highlighted when Ieuan Jones of our Dispute Resolution Team acted for the majority shareholders during a shareholder dispute with a former employee. Through successful mediation as a form of alternative dispute resolution, he was able to secure a favourable outcome for the majority shareholders in a claim worth over £500,000.
To preserve the confidentiality of the alternative dispute resolution process, certain key details, including all party names, have been changed in this mediation case study.
The background
FizzyCo is a fizzy drinks manufacturer started by its founders, Tammy and Robert, several years ago in Tammy’s garage. In its early years, without much capital to get things moving, Tammy would rope in various friends and associates to help produce, bottle up, and crate the fizzy drinks for sale and distribution locally.
One such worker was Billy. Billy was a friend of a business associate who started out as one of the hands on the small production line. Billy was keen and so eventually worked his way up to managing the production line, while Robert dealt with the accounts and Tammy got on with managing FizzyCo as MD.
The company did not have a great deal of money when FizzyCo started out, so it was agreed that, on top of his small wage packet, Billy would also take a 10% shareholding in the company – so Tammy and Robert agreed to donate him 5% each.
On legal advice, a shareholders agreement was drawn up in which Billy was transferred the shares. As is often the case, the shareholder’s agreement also contained terms about company governance, including giving shareholders a more equal say in the running of the business. Also in there was a mechanism for an automatic buyback of a shareholder’s shares by the others if certain criteria were met.
Eventually, Billy was also made a director on the board of FizzyCo alongside Tammy and Robert. So all was well and good and working just fine in their startup business, each with defined roles and responsibilities and with their say in how things were run.
Business really starts to fizz
Fast forward a few years and FizzyCo far outgrew its humble beginnings in Tammy’s garage. It now had its own distribution centre in the South West and was making healthy profits with sales to shops and supermarkets, as well as through its website, thanks in part to a boost of sales during Covid. It was now in talks with a manufacturer to help deal with the production side.
As director and minority shareholder, Billy had also retained his role as manager, however, there was concern from Tammy and Robert that the responsibilities of running a large distribution site were perhaps a step beyond the abilities of someone first employed to run a small production line in a garage, although Billy insisted he could keep up with the pace of change.
During this time relations between Billy on the one hand, and Tammy and Robert on the other, started to sour. Tammy and Robert thought that Billy was not up to running a major operation that needed and expected to meet consumer demand, while Billy in turn thought that Tammy and Robert were ganging up on him and excluding him from company business unfairly.
Things go a bit flat
One day, following a heated exchange during a board meeting, Billy told them he “quit” and promptly stormed off without saying anything more. During the toing and froing that followed, with texts, e-mails and phone calls all flying about, Billy insisted that he was gone, wouldn’t hear anything about being tempted back and, crucially, he could name his price for his shares on departure
Following that bombshell, Tammy and Robert went back over their shareholder’s agreement. They realised there was a clause in there that said they were entitled to force a compulsory purchase of the shares of a “departing employee”. Tammy and Robert figured that, as far as they were concerned, Billy was a departing employee so they could set in motion the compulsory purchase mechanism for the purchase of his shares. They also removed Billy from the board by ordinary resolution, using the procedure as set out in the Companies Act.
Billy reacted badly to what Tammy and Robert were doing. He expected that there would be a price negotiation over his shares, rather than a compulsory purchase. Billy also claimed that they were not entitled to take his shares away anyway, because he was not a “departing employee” but had been a self-employed worker contracted by the company the whole time.
Everything goes “pop”
Relations between the parties went from bad to worse, until one day Billy decided he’d had enough and would go down the legal route. So he issued an “unfair prejudice” petition against Tammy and Robert as the majority shareholders through the Court.
Unfair prejudice petitions are brought by shareholders, almost always by a minority shareholder against the majority, because they believe they have been treated unfairly by them in a prejudicial way. This can be for any number of reasons, for example the majority are acting in breach of the company’s constitution, to the detriment of the minority shareholder. It can also occur when there is a legitimate expectation that the minority shareholder will participate in the conduct of the business (a “quasi-partnership” type arrangement), only for them to be shut out by the majority.
The Court can provide a wide range of remedies to the minority shareholder, if they prove they were subjected to unfair prejudice, although this often amounts to a remedy concerning their shares. One option is for the Court to make an order for the majority to buy back the minority shareholder’s shares for fair value – what is “fair value” is something for the Court to determine, having considered each party’s case.
Keeping a lid on it
Tammy and Robert considered Billy’s claim and decided that, rather than go through the very expensive, time consuming, and aggravating route to a Court hearing, with an uncertain outcome at the end of it all, the best thing to do early on was to explore methods of alternative dispute resolution and mediate with Billy to sort it out.
After all, if the Court was overwhelmingly likely to order a share buyback, they may as well work out for themselves what the value of this might be, since this would give them far more control over the process. Plus, if they explored alternative dispute resolution early enough, the mediation process would be a small fraction of the cost of taking the case to Court, but with a more certain outcome. It would also get the dispute out of everyone’s hair at an early stage, so all parties could shake hands and put it behind them there and then, rather than waiting years for a Court decision.
Court proceedings were therefore paused while the parties rolled up their sleeves to get the mediation process on track. Tammy and Robert gave Billy a shortlist of mediators that they believed would do a good job. These mediators worked in the commercial sector and had all dealt with many shareholder disputes before – including ones involving unfair prejudice and share buybacks. Eventually, Stephanie, a former commercial disputes solicitor, was chosen to be the mediator for the day.
Once the finer points were sorted out – what day it was going to be, where it was going to be held, how to get there, where to stay – all that was left was for the parties to turn up on the day and see what happened.
The alternative dispute resolution process begins
The mediation itself was held on neutral ground – a barrister’s chambers at a midway point roughly between where the parties live. Although it is still quite usual to have an opening session, where the mediator introduces themselves and sets the mood for the day, on this occasion it was decided that things were still a bit too raw between them, so the parties’ energies were perhaps better spent getting down to business right away.
In that regard the parties had each come armed with their own valuations for Billy’s shares, undertaken by independent third-party valuers. Much of the day was spent poring over these valuations to see how and in what way either could be critiqued – and also where there was common ground. Various factors came into play when deciding on their value, including the continued growth and success of the company – as set against the fact that Billy’s shares were only 10% of the value of the company and would inevitably be heavily discounted on the open market.
With that exercise more or less over by lunchtime, after lunch the parties set about making offers for Billy’s shares – in typical fashion Stephanie ferried between the two rooms, passing details of each other’s offers and also giving her thoughts on the merits, or otherwise, of the offers on the table.
Finally, Tammy and Robert accepted an offer by Billy for what they considered to be a reasonable price for his 10% shareholding. With the offer having been accepted, all that was left was for the parties to sign up to a contract containing the terms of their agreement. As Tammy and Robert’s solicitors, we had already come armed with a draft agreement, so there was no need to draft anything from scratch – it was a simple case of putting in the agreed terms in the relevant place in the agreement prior to signature.
It is somewhat normal for something to be thrown in the mix late in the day at mediation, and this day was no different. On this occasion, Billy asked for an “anti-embarrassment” clause to be drafted into the agreement at the last minute, meaning, if the company is sold within 12 months of signature, then he gets an enhancement on the price of his shares. As there were no plans to sell FizzyCo anytime soon, Tammy and Robert agreed to his request for this clause to be put in with no real qualms.
With the signatures drying on the page and the deal having been done, the parties were called in by Stephanie for a final thank you and goodbye before they all went their separate ways.
A pleasant aftertaste
The word you hear most often from a party once a case settles through alternative dispute resolution is “relief”. They are relieved that, however long it took them to get there, however fraught the journey, however raw the emotions, and however things went down on the day, the dispute is finally in the rearview and they can all get on with their lives. In the case of our clients, Tammy and Robert, they can get on and continue to grow the business they had founded together without the constant distraction of litigation hanging over them. It is also worth saying that part of that relief came from knowing they had got a piece of mind but at a fraction of the cost it would have taken them to get a decision by a Judge.
It is little wonder therefore that clients in all types of dispute are choosing to avoid the high cost, aggravation and uncertainty of having their dispute decided by the Court and going instead with an alternative dispute resolution option such as mediation for more control and management over the dispute resolution process.
If you are dealing with a complex business dispute then our solicitors in Plymouth can help. GA Solicitors’ dispute resolution team are on hand to help you explore the most appropriate way of resolving your matter, whether that be through mediation or another alternative dispute resolution method. We will be on hand to provide the highest levels of client service throughout your dispute to guide you towards a favourable outcome as a shareholder or director.
For more information, call 01752 203500 or email me directly at ieuan.jones@GAsolicitors.com.
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