What to look out for during a shareholder dispute.
If you are involved in a shareholder dispute be sure to take advice on the matter sooner rather than later so that the matter can be resolved in a certain manner and that you can resume business quickly.
1. Be calm and think clearly. You will recall the famous sign during the Blitz in the UK which read “Keep Calm and Carry On”? When things start to go wrong from a work or business perspective, it is important to stand back, to be objective and not get drawn into any arguments. Very often instructing a solicitor to ascertain your rights and deal with the immediate issues and threats allows you time to think about what your goals are and your future strategy.
2. Breakdown the key issues – write down what you believe the issues in dispute are. What are the boundaries? Can the issues be resolved or do you believe it is the end of your business relationship? Set out the issues which you think are personal i.e. “I don’t like the person or the way they do business”, the business issues, such as “I want to own the entire business” or “my business partner is nearly 65 and wants to sell the business and retire” and the contentious issues such as “I think my partner is stealing from the business or wants me out of the business”. Define what the issues are and this will allow you and your advisers to make informed decisions.
3. Get advice. Forewarned is forearmed as the famous saying goes. The whole psychological element of a dispute or argument changes if you are fully aware of your rights and what the risks are. It is much easier to make an informed decision based upon sound advice and facts. It is also vital to get an independent view of matters to identify key issues and in many instances to confirm strategy and tactics.
4. Don’t forget alternative methods of solving your dispute. We are trained to negotiate on your behalf whether by informal non-binding discussions, mediation, arbitration or in Court. If the parties are agreeable, a formal or informal mediation might result in bringing the parties together and agreeing a solution. Similarly, many shareholders agreements have deadlock provisions and arbitration clauses – very often a non-confrontational approach can provide the solution that you are looking for. But remember you will need both legal and financial advice in relation to these alternative methods of dispute resolution.
5. The value of your business. If you ask any accountant, they will tell you there are more than twenty different ways of valuing a business. Don’t be tempted to value the business yourself, a whole range of factors need to be considered. You are as likely to overvalue your business as to undervalue it. The critical point is that the value of your business will have serious implications in relation to how to approach negotiations, how to find a solution and how to get the best result for you at the end of the day.
6. Be clear in what you want to achieve – don’t lose track of your goal, become vindictive or try and score points against your business partner. Very often negotiations can become side tracked in relation to side issues – be prepared to concede on certain issues. Conceding non-essential issues can be effectively used as a strategy or negotiation method.
7. Friends for Life. Regularly, business partners will not have entered into a shareholders agreement. There are many reasons for this, the business relationship may have commenced as a very informal arrangement, you might be friends and feel that there was absolutely no way that you were ever going to fall out, or you simply didn’t think about it or didn’t know shareholders agreements ever existed. The a-typical dispute is where a business starts to do really well and one business partner is doing all the work and the other partner makes little or no contribution to the business and is still entitled to 50% of the shares in the company. Whatever the reason might be, there is always the potential for a dispute and critical to all of this is that even if you are the best of friends, make sure you have a shareholders agreement. So, if you are bickering over small matters now, tie down the important issues in a shareholders agreement as soon as possible.
8. Shareholders Agreements. For as many times as business partners have not entered into a shareholders agreement, they will have done so and that agreement will determine what happens if there is a dispute or if one or more of the business partners want to leave the business or sell up. The agreement may require that the business partners settle disputes by arbitration or mediation or in Court. There should also be other key conditions relating to the duties of the owners of the business, their involvement in the business, what happens if one or more parties want to exit or sell their interest in the business and similar critical issues such a representation at board meetings and the making of key business decisions. It is important to be aware of these terms and conditions and the will form part of your negotiations. Get advice in relation to their interpretation, be aware of any shortcomings and how to use these conditions to your best advantage.
9. Be creative. What do we mean by that? Well if the solution does not seem obvious at first, look at ways of introducing venture capital, spreading payments, offering options or similar inducements. Don’t forget that there may also be tax issues or other financial constraints on the business – there are many ways that you can structure your exit or the exit of a partners or partners from a business, payment can be in cash, shares or assets and at different times, amounts and financing.
10. If you manage to negotiate a settlement to your dispute, make sure that the goals and resolution are achievable. For example, if you agree to accept €500,000 for your share of the business paid in equal instalments over 4 years – make sure your business partner or the business has the capacity to earn this money and make sure your have security over some assets to ensure and guarantee payment. You don’t want to be in Court in two years time trying to enforce your agreement.
Please contact Milan Schuster for further information and advice on this matter.