A breakdown in the relationship between directors and shareholders can cause significant challenges for a company. When tensions escalate between directors and shareholders, the resulting disputes often revolve around issues such as corporate decision-making, financial transparency and the allocation of resources.
Such conflicts can undermine trust and cooperation within the company, leading to potential disruptions in operations and hindering long-term growth prospects. In this context, dispute resolution mechanisms such as mediation are increasingly being recognised as an alternative to the traditional route of litigation.
Bring a Claim against Directors
One common recourse for shareholders in Ireland is to bring a claim on behalf of the company against directors for breaches of fiduciary duties or other unlawful conduct. Similarly, minority shareholders may seek relief through the oppression remedy provided under Section 212 of the Companies Act 2014 when their interests are prejudiced or marginalised within the company.
Directors, on the other hand, have a vested interest in preserving corporate harmony and safeguarding the company’s interests amidst shareholder disputes. They may invoke defences grounded in statutory provisions and common law principles to shield themselves from personal liability and uphold their fiduciary duties.
Mediation
However, litigation can be protracted and resource-intensive, further straining the relationship between parties. Therefore, solicitors often advocate for mediation to achieve timely and amicable resolutions. Proactive engagement with shareholders and transparent communication can often pre-emptively mitigate disputes and foster a cooperative environment within the company.
A recent example which demonstrates the benefits associated with mediating shareholder-director disputes is the case of Walls Construction Holdings Limited v the Companies Act 2014 [2023] 21 COS. This case involved a dispute between shareholders over a proposed “growth share scheme”. The matter came before Mr Justice McDonald in the Commercial List on Monday, 11 March 2024. The Court had previously advised the parties to attempt to resolve the issue through mediation and was very satisfied to hear that the mediation had been a success and had resulted in the settlement of the case. This is a clear demonstration of the way in which the pursuit of alternative dispute resolution can lead to the early resolution of shareholder-director disputes.
Disadvantages of Litigating a Dispute
The Court of Appeal’s decision in Mascarenhas v Karim & Another [2022] IECA 48 illustrates the disadvantages that come with litigating a shareholder or director dispute. The Plaintiff, Tiago Mascarenhas, filed a petition alleging shareholder oppression under Section 212 of the Companies Act 2014 concerning Skills & Enterprise Development Academy (“SEDA”) Limited, which operated an English language college in Dublin. The disagreement between the parties emerged in 2015, with legal proceedings initiated the following year.
The case concluded in the High Court in 2019, with Justice Costello delivering the judgment in March 2022, approximately seven years after the deterioration of the parties’ relationship. The financial and time commitments incurred due to such a protracted dispute would undoubtedly be substantial.
Impact of Declining to Mediate
Furthermore, in this case, one of the parties declined to mediate on two occasions, and the Court refused to make any deduction from the costs of the Applicant in conducting the two appeals. As time progresses following the introduction of the Mediation Act of 2017, there will be an increasing recognition of the negative impacts of declining mediation in such situations i.e. being penalised by the Court in a costs order.
Value of Open and Transparent Communication
In the case of Healy v Careplus Pharmacy DAC & Ors [2023] 5075, the Plaintiff, a 25% shareholder and director of Navicorp Limited, applied to the High Court for a temporary injunction preventing the Defendants from taking any steps to transfer his shares in the company.
The matter came before the High Court in October 2023, and the Court was informed that extensive talks had occurred between the parties which resulted in an accommodation in relation to the Plaintiff’s injunction application.
Mr Justice Sanfey commended the parties for their efforts in finding a resolution. This highlights the fact that the Court recognises the value of open and transparent communication in director or shareholder disputes.
Conclusion
In conclusion, relationship breakdowns between directors and shareholders in Ireland present formidable challenges for companies, requiring careful navigation and strategic resolution.
Shareholder or director disputes can become particularly challenging, especially after years of court proceedings, with respect to any possibility of maintaining a continued relationship. To that end, alternative dispute resolution is gaining recognition as a viable substitute for litigation, providing swifter, confidential and economically efficient resolution options.
By promoting open communication, fostering collaboration and advocating for fair and equitable solutions, solicitors can help parties address disputes effectively and mitigate the adverse impacts of relationship breakdowns on corporate governance and long-term viability.
Further Information
For further advice on shareholder or director disputes or on any related matter, please contact Ciarán Leavy, Partner and Head of the Commercial Litigation and Dispute Resolution Team.
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