WHEN FUNDING TURNS TO FIGHTING: SHAREHOLDER DISPUTES IN PRIVATE EQUITY-BACKED COMPANIES

A panel session covering shareholder disputes commonly arising in private equity-backed companies.

It’s a classic scenario: some founders start a company and later bring in private equity investors. At the time of investment a new and detailed set of articles and a shareholders’ agreement are entered into giving the investors significant control and financial rights. The investors nominate directors who have a majority at board level. With time, the relationship between the investors and founders breaks down and the investors take steps which the founders regard as unfair. A dispute arises which may lead to proceedings.

This panel session will consider the types of disputes that commonly arise in a private equity- backed company (from the perspectives of both sides), how to resolve them, how to try to avoid them, as well as some of the key questions relating to valuation on a buy-out of the founders’ shares. The topics will include:

• Introduction to shareholder claims, including sections 994 and 996 of the Companies Act 2006.

• Key features of private equity investment structures in the context of shareholder disputes.

• The importance of the articles and shareholders’/investor agreements.

• The types of situations that generate disputes in private equity-backed companies, and the claims that can be made as a result, including:

- Conflicts of interest and breaches of duty by nominee directors

- Dilution

- Identification/engineering of insolvency events

- Removal of a founder and operation of leaver/compulsory transfer provisions

- Exits, including drag-along provisions

• Can a quasi-partnership/equitable considerations arise in a private equity-backed company?

• Strategy in boardroom disputes.

• Valuation of founders’ shares:

- Early stage funding round valuations, where pre-revenue or pre-profit

- Valuation of different classes of shares with differing rights

- Management fees and interest charged on debt lent by private equity owners

- Minority discount