Neha Sachde – Senior Associate ([email protected])
It is common for Shareholders to have minor as well as major differences in opinions among themselves concerning several issues such as the company’s governance, its processes, or finances. However, when Shareholders have differences on issues of major concern, it is often difficult to compromise, thus, having a negative impact on the company. In some cases, this even brings the firm to the brink of collapse. In this article, we cover ways in which Shareholder disputes may be resolved with special emphasis on the Commercial Companies Law (CCL).
Shareholders are described as Partners in Limited Liability Companies and Shareholders in Joint Stock Companies. In the interests of clarity, we adopt the term ‘Shareholder’ in this article to address both Partners and Shareholders. It is important to understand the point of contention and seek an effective way to mediate disputes where Shareholders have failed to resolve their differences by applying to the Court to order the removal of a particular Shareholder from the company or seek dissolution of the company. Such requests under Bahraini Law can be made to the Court under Article 321 of the Commercial Companies Law (CCL) which provides that:
“Except for Public Shareholding Companies, a company may be dissolved by a court ruling upon the request of any of the partners for any reason deemed serious by the court to justify the dissolution. Any condition denying the partner from exercising this right shall be deemed void ab initio. If such reasons result from the actions of one of the partners, the court may rule to remove him from the company and to evaluate his share according to the latest inventory, unless the company’s Memorandum of Association provides for another method of evaluation. In this case, the company may continue among the other partners.
The court may also rule to dissolve the company upon the request of one of the partners where another partner fails to fulfil his obligations”.
Under Article 321 of the CCL the two remedies available to the shareholders in case of a dispute are the following:
Removal of a Shareholder
This is one of the most beneficial approaches as it allows for the removal of a troublesome Shareholder i.e. a Shareholder whose conduct threatens the existence of the company and its ability to conduct regular business. It is presumed that the removal of a Shareholder is much safer against the Dissolution of the company, especially in cases where the company is solvent and trading.
To remove him/her, an application must be made as per the request of one of the company Shareholders. In such cases, the applying Shareholder will need to exhibit that the act of the troublesome Shareholder is so acrimonious that the cooperation and trust between the Shareholders has broken down completely and has had a direct impact on the company’s existence.
The court will conduct a close review of such disputes and if satisfied that owing to the conduct of the troublesome Shareholders – the company has led to a frustration of its commercially viable operations and that in the given situation, a loss of confidence is justified – the court will order the removal of the said Shareholder from the company.
While removing such a Shareholder from the company, the court will evaluate his share according to the latest audited financial statements of the company unless the company’s Memorandum of Association provides for another method of evaluation. If an order expelling a Shareholder is passed, the company can continue functioning with other Shareholders.
Dissolution of the company (except for public shareholding company)
Under this approach the shareholders can apply to the court and seek a dissolution of the company. The court would only accept this application if the court is satisfied that there are serious reasons justifying the dissolution. This implies that the Shareholder seeking dissolution should demonstrate that the nature of Shareholder disputes is so serious that the continued existence of the company shall be contrary to the company’s objectives and if the company is not dissolved – it shall be detrimental to the objects of the company.
The court while deciding over a dissolution application must be satisfied that no other remedy is available to the applicants and that they are acting reasonably in seeking to have the company dissolved instead of pursuing any other remedy.
Before passing an order to dissolve the company the court will also ensure that all proper means of resolving disputes as per Shareholder agreements and the company’s Memorandum of Association have been exhausted and dissolution is the ultimate option available in the best interest of the company.
Burden of Proof
The burden of proof, in accordance with Article 1 of the Bahraini Law of Evidence for Civil and Commercial matters lies on the Shareholders seeking the removal of the said Shareholder or the dissolution of the company. They will need to prove beyond reasonable doubt that (a) For the removal of shareholders – the dispute caused by the troublesome Shareholder is directly responsible for a negative impact on the company’s functioning; and (b) The dispute leading the aforesaid request is serious in nature and dissolution of the company is the best resort in the interest of the company.
Contrary Contractual term is deemed null and void
The right of a shareholder to seek removal of shareholders or dissolution of company, is a right protected under Article 321 of the CCL and any contractual term depriving the shareholders of such right, if exists shall be deemed null and void.
When there are disputes amongst Partners in family-owned businesses/ Limited Liability Companies or Shareholders in Joint Stock Companies (except public companies) and if such disputes are irreconcilable, the concerned Shareholders can choose either of the two options available under Article 321 of the CCL.
The application by the concerned Shareholder shall be strictly interpreted and will not be accepted for random reasons for exclusion of a shareholder, or to dissolve a company. Application under Article 321 will be only be accepted for serious reasons which are justified, and only when the court is satisfied that removal of a shareholder is necessary or dissolution of company is in the best interest of the company. Such an order is only passed when the court is satisfied that there is no other resort available to settle the dispute and passing the order is in the interest of the company.
For more information, please contact us on [email protected].