Shareholder disputes can be inevitable. Companies need to understand how to most effectively diffuse these disputes when they happen and what constructive steps they can take to avoid intensifying the disagreement. Below are practical steps that can mitigate the consequences of a shareholder dispute and hopefully avoid disruptive shareholder actions.
Shareholder disputes arise in many ways, including fallout over the management and direction of the company, shareholders not pulling their weight or no longer working for the benefit of the business, personal problems affecting business relationships, conflicts of interest, lack of dividend distributions, breach of a director’s service contract, or concern over possibly illegal or fraudulent activities by any or all of the board.
Disputes often escalate because the parties don’t get advice early on about their legal rights and don’t understand the best options and strategies to keep their businesses operating healthily.
A shareholder agreement should provide guidance in the event of a disagreement, so be sure to start by checking that agreement — as well as any other related business documents like the company’s formation documents — to understand the rules governing the company and its shareholders. The phrase “shareholder agreement” is sometimes used interchangeably with a “unit holder’s agreement,” or other such document.
When looking through these documents, look for provisions designed to resolve disputes; these can save a great deal of time and money. One such common clause is an agreed procedure for forcing a shareholder to sell their shares at set valuations in certain circumstances.
If, however, your company doesn’t yet have a standardized shareholder agreement, now is a great time to negotiate a comprehensive one to protect both the business and its shareholders from future potential litigation. In the meantime, below is a list of some methods to resolve a shareholder dispute.
If permitted by the company’s governing documents, a request for a general meeting may allow the board to call a meeting of the shareholders to address a dispute. In a formal meeting, a disagreement among shareholders can sometimes be resolved simply by voting power or through face-to-face discussions.
The written request should clearly state what business will be dealt with at the meeting and can also include the text of any resolutions to be proposed. If the request includes such a proposed resolution, it should be included in the notice, which makes the proposed resolution a part of the business to be conducted at the meeting. The directors must ensure notice of these meetings is provided in accordance with any applicable statutory provisions or formal governing instruments.
If negotiations for a new or revised shareholder agreement are stalled and existing governing rules are no longer sufficient, bringing in a new mind can help. For example, bringing in another director or appointing a board advisor to resolve conflicts or offer a fresh and dispassionate perspective can work out well in some situations. Similarly, using a director or other officer who is not involved in the day-to-day business operations to resolve shareholder disputes or to avoid a voting deadlock could be the best solution. Uninterested parties are more likely to be impartial and therefore more likely to act in the best interests of the company rather than the individual shareholders.
While it is inadvisable to attempt to remove a director without first obtaining legal advice (as there may be consequences if the director is also a shareholder or an employee of the company), if the shareholder agreement permits, obtaining the required consent to remove a director can resolve the dispute. Sometimes the threat of removal is enough. But remember, it is not a good idea to go all the way and remove directors without first obtaining legal advice; the removed directors may, for example, bring claims for unfair dismissal.
Look for specific clauses in the company’s articles, shareholders agreement, directors service contract, or other legal documents that enable a director to be removed and follow them in due course.
To keep relationships intact and hopefully avoid costly and time-consuming legal action, try to negotiate a workable compromise. It is almost always quicker and cheaper to negotiate a solution than if you end up in court. An experienced shareholder-dispute lawyer can advise you on what you can realistically hope to achieve in negotiating.
All sides to a dispute should use separate legal counsel in negotiations, so lawyers ensure a legally enforceable and comprehensive final agreement is produced and implemented correctly.
If direct negotiations don’t work, try mediation next. Regardless of whether you want to mediate, should a lawsuit ultimately become necessary, the courts will likely require you to attempt mediation anyway. And shareholder agreements often contain dispute-resolution clauses requiring the parties to engage in alternative dispute resolution before moving into litigation or engaging in other measures.
Mediation uses an independent professional to facilitate confidential discussions in order to avoid posturing and instead focus on solutions. Mediation is both quicker and cheaper than litigation. By at least one estimate, over 90% of disputes brought to mediation are resolved. But perhaps the most important factor determining mediation success is selecting the right mediator for your particular set of circumstances.
A disputing party can buy shares held by other shareholders. While this method of resolving shareholder disputes can be less complicated, one generally needs a lot of cash to make this type of offer. A company’s shareholder agreement may even set out the process for internal buyouts.
A buyout of shares can work many different ways. For one, if a shareholder wants to exit the company and the company has the funds to buy their shares, it can. Alternatively, as mentioned above, another shareholder can initiate the buy out. Shareholders can also choose to sell to third-party investors.
At Burford Perry, our commercial litigation attorneys have the experience to advise you or your business when dealing with a dispute between shareholders or directors. Our extensive knowledge and experience resolving these disputes as quickly and cost-effectively as possible helps minimize the risks to your business.