Shareholder disputes are among the most disruptive events that can affect a company. They divert management attention, damage business relationships, create uncertainty for eymployees and customers, and can ultimately destroy value. In Nigeria, shareholder disputes are governed primarily by the Companies and Allied Matters Act 2020 (CAMA 2020).
Common Causes of Shareholder Disputes
Shareholder disputes arise in a variety of circumstances: disagreements over dividends and profit distribution, disputes about the direction or strategy of the business, allegations of mismanagement or breach of directors duties, disputes over the valuation or transfer of shares, deadlock between shareholders with equal voting rights, exclusion of minority shareholders from management decisions, and allegations of fraud or diversion of company assets.
Oppression and Unfairly Prejudicial Conduct
Section 358 of CAMA 2020 allows a member of a company to petition the court where the affairs of the company are being conducted in a manner oppressive to any member or in disregard of their interests as a member. The court has wide powers in response, including the power to regulate the conduct of the company affairs and require the company or other members to purchase the petitioner shares.
Derivative Actions
A derivative action allows a shareholder to bring a claim on behalf of the company where the company itself has suffered a wrong but the directors have refused to pursue the claim. Under CAMA 2020, a member may apply to the court for leave to bring a derivative action if the cause of action prima facie exists and it is in the interests of the company that the action be brought.
Winding Up on the Just and Equitable Ground
Where a company has become fundamentally deadlocked, or where the trust between the founding shareholders has completely broken down, a shareholder may petition for the winding up of the company on the just and equitable ground under CAMA 2020. Courts apply this remedy with care, as it effectively ends the company.
The Role of the Shareholders Agreement
The most effective way to prevent and manage shareholder disputes is through a well-drafted shareholders agreement. Such an agreement can address: the rights of minority shareholders including veto rights over reserved matters, deadlock resolution mechanisms, restrictions on the transfer of shares, pre-emption rights giving existing shareholders the first right to purchase shares being sold, and the calculation of share valuation in the event of a buy-out.
Alternative Dispute Resolution
Many shareholder disputes can be resolved more quickly and cost-effectively through mediation or arbitration than through court proceedings. Mediation offers a structured environment in which the parties can explore commercial solutions that may not be available in litigation, such as a share buy-out on agreed terms.
Conclusion
Shareholder disputes are manageable, but they are much easier and less costly to manage when the legal framework has been established in advance through a well-drafted shareholders agreement. Founders and investors should take legal advice when structuring their shareholding arrangements and should not defer this step until a dispute has already arisen.
This article is for general information only. For advice on shareholder disputes or shareholders agreements, contact Marturion Legal.