It might start by you getting locked out of the company’s computer system, or your role in the Company disappearing. It may be your pal, the MD has got a new car or has taken funds to top up their pension. Very often shareholder disputes are fractious, bitter and they gnaw away at personal relationships. Seldom do the parties to these disputes resolve their issues so that they can keep working together.
A shareholders dispute is any disagreement between shareholders of a company that may impact the shareholders or the business.
Unresolved conflicts can lead to legal complications, financial loss and disruption of operations.
With effective negotiation and conflict resolution techniques, shareholders can manage their disputes without involving expensive and time-consuming litigation. The successful resolution of a shareholder dispute will ensure the continuity of the business and protect your interests.
Understanding the types of shareholder disputes
Shareholder disputes can take many forms, including:
- shareholders neglecting their duties;
- lack of contribution to the business;
- disputes over changes to the company’s Constitution;
- dissent over management decisions or strategies;
- conflict of interest between shareholders and directors;
- disagreements about the valuation of company assets;
- questions related to dividend payments and share-purchase rights;
- issues surrounding mergers and acquisitions;
- concerns over unequal access to information and systems;
- challenges in transferring shareholder ownership;
- majority shareholders looking to remove minority shareholders.
1. Contact shareholder disputes solicitors
Shareholder dispute lawyers can give you an overview of what the keys issues in dispute are and help you to understand your rights. Having a clear strategy is particularly important for complex and contentious shareholder disputes.
You should contact a legal expert as soon as a dispute arises to try and avoid costly court proceedings.
2. Review the terms of your shareholders agreement
If you have a shareholder’s agreement, it will usually set out what happens if there is a dispute or if one or more of the business partners wants to leave the business or sell up.
Your shareholder’s agreement may require that you and your business partner settle your disputes by arbitration, mediation or in Court.
In addition, there may be other key terms and conditions relating to the duties of the owners of the business. These may include terms and 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.
Be aware of any shortcomings and how to use these terms and conditions to your best advantage.
3. What if no agreement is in place?
A recurring issue seems to be that business partners will not have entered into a shareholder’s 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. That underperforming partner is still entitled to 50% of the shares in the company. Whatever the reason might be, there is always the potential for conflict and a dispute.
Critical to all of this is that even if you are the best of friends, make sure you have a shareholder’s agreement. So, if you are bickering over small matters now, make sure that you tie down the important issues in a shareholders agreement as soon as possible.
4. Review the Company’s Constitution
A Company’s Constitution is the governing document of every company. In legal terms, the constitution automatically binds the company and its members (see Section 31 Companies Act, 2014) although the members are only bound by the terms of the constitution in their capacity as shareholders of the company and not in any other capacity.
Very often the Company’s Constitution may contain provisions that affect shareholders. The Company’s Constitution needs to be reviewed in tandem with your shareholder’s agreements.
Business people who set up a Company rarely fully understand the purpose or implications of a Constitution or indeed the differences between a Constitution and a shareholders’ agreement.
Many Constitution are prepared by company formation agencies, accountancy firms or solicitors’ firms and they contain various important provisions relating to the internal regulation of a company. However, most Constitutions do not deal with the key issues of internal regulation that shareholders might on a fuller consideration of the matter consider appropriate or necessary for the smooth running of a company. You can of course ‘customise’ the Constitution of a company so that it deals with these matters in a more comprehensive and targeted manner.
Without doubt, Constitutions can deal with all matters which you would typically see in a shareholders’ agreement. Whilst this is arguably true there are certain key reasons why shareholders more often choose to regulate their relationship between one another as shareholders by means of a shareholder’s agreement rather than by means solely of the Constitution.
5. Keep a record of 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”. There very often is more 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.
6. Alternative Dispute Resolution
The use of informal non-binding discussions, mediation or arbitration can help you avoid court proceedings. If the parties are agreeable, a formal or informal mediation might result in bringing the parties together.
In turn, that may lead to resolving your shareholder 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.
We have considerable experience in resolving shareholder disputes using alternative dispute resolution. Contact us here to find out more.
7. Consider 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 dispute and how to serve your best interests.
8. Be clear in what you want to achieve
Don’t lose track of your goals, or become vindictive or try and score points against your business partners.
Do not let side issues distract you from your negotiations. Be prepared to concede on certain issues with the other shareholders involved.
Conceding non-essential issues can be effectively used as a strategy or negotiation tactic, whether you are a majority shareholder or a minority shareholder.
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, capital reductions 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. Are your goals 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 you have security over some assets to ensure and guarantee payment. You don’t want to be in Court in two year’s time trying to enforce your agreement. Make sure the agreement you reach is realistic, you might not get everything you ask for and don’t make unrealistic promises to pay in relation to targets or the payment of money.