What to look out for in shareholder disputes.
Without doubt, shareholder disputes are the most difficult to resolve. If you are involved in a shareholders dispute, be sure to take advice on the matter sooner rather than later. It is important that the matter can be resolved without disruption and that you can continue to do business. Do not let your problems fester. You need to act in a proactive manner.
1. Firstly, be calm and think clearly.
Certainly, 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. You need to be objective and not get drawn into any arguments. Very often, you need to instructing a solicitor to clarify your rights and deal with the immediate issues and threats. That allows you time to think about what your goals are and your future strategy.
2. Secondly, break down the key issues
write down what you believe the issues 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”. Also, 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”. Then the contentious issues such as “I think my partner is stealing from the business or wants me out of the business”. To be successful in shareholder disputes, you need to define what the issues are. This will allow you and your advisers to make informed decisions.
3. Most importantly, get advice.
Likewise, forewarned is forearmed as the famous saying goes. The whole psychological element of a shareholders 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. Certainly, don’t forget alternative methods of solving your dispute.
Most importantly, we are trained to negotiate on your behalf. Sometimes we us informal non-binding discussions, mediation, arbitration or your dispute might end up in Court. If the parties are agreeable, a formal or informal mediation might result in bringing the parties together. In turn, that may lead to a solution to your shareholders dispute. 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.
Of course, 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. It will also have implications for solving your disputed and how to get the best result for you, at the end of the day.
6. Be clear in what you want to achieve
Above all, don’t lose track of your goal, or become vindictive or try and score points against your business partner. Do not let side issues distract you from your negotiations. Be prepared to concede on certain issues. Conceding non-essential issues can be effectively used as a strategy or negotiation tactic.
7. In short, friends for Life.
A recurring issue seems to be that 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. One business partner is doing all the work and the other partner makes little or no contribution to the business. The partner is still entitled to 50% of the shares in the company. Whatever the reason might be, there is always the potential for a dispute. 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. 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. Your shareholders agreement may require that you and your business partner settle your disputes by arbitration, mediation or in Court.
In addition, there should also be other key conditions relating to the duties of the owners of the business. These may include conditions relating to their involvement in the business or what happens if one or more parties want to exit or sell their interest in the business. Other critical issues include your representation at board meetings and the making of key business decisions. It is important to be aware of these terms and conditions. They 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 to you at the outset, 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. You can structure your exit or the exit of a partner from a business in many different ways. Payment can be in cash, shares or assets and at different times, amounts and financing.
10. Overall, 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, does your partner have the capacity to pay it? Make sure your business partner or the business has the capacity to earn this money. In addition, 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.