When two individuals, often friends or family, decide to start a business together, they often opt for a 50/50 split of ownership. This seems fair and logical, as both owners are entitled to equal profits and share the responsibilities of running the business. However, this equal partnership can lead to a deadlock dilemma when differences of opinion arise, as neither shareholder has a controlling share or say in important matters.
In the context of running a limited company, important decisions require resolutions to be passed through ordinary or special resolutions. Special resolutions require at least 75% of the shareholders to vote in favor, while ordinary resolutions require a simple majority of at least 51%. This means that as a 50% shareholder, you have no control over business decisions, just like the other 50% shareholder.
Even at the board level, if there are only two directors, both directors must agree unanimously unless the company's Articles of Association state otherwise.
To avoid being stuck in a stalemate, shareholder agreements are crucial for setting up a limited company together. These agreements outline how dividends will be paid, how shareholder responsibilities will be divided, and most importantly, how disagreements will be resolved. By having an agreement in place from the beginning, it can help save the company and preserve the working relationship in case of conflicts.
Without clear terms for resolving disputes in a shareholder agreement or the company's Articles of Association, the consequences for a limited company can be disastrous. If one shareholder wants to borrow funds for long-term growth while the other wants to cut costs for short-term profits, it may result in a stalemate. However, if there are allegations of misconduct or serious trust issues, neither party has the power to protect the business or remove the other director and shareholder. In such cases, seeking legal action, such as pursuing an unfair prejudice action, may be the only option.
Once trust issues have already emerged, it becomes difficult, if not impossible, to establish an agreement on how to resolve them. However, by establishing a clear path for dealing with difficult issues at the start of the working relationship or when the relationship is still positive, it can save you stress and expenses in the future.
The matters contained within this article are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions.
Before acting on any of the information contained herein, expert advice should always be sought.