There is nothing so sad as a good business brought to it knees by a shareholder dispute, or an embattled management team distracted by unproductive shareholder interference. Yet these situations are all too common. They may not all be avoidable, but regular and constructive engagement between management and shareholders will do much to mitigate the damage they can cause, which can be very considerable.
Knowing you shareholders and their agendas
Shareholders come in all shapes, sizes and types. They may be fellow executives or former executives, or relatives. They might be employees, either directly or through a pension scheme. They may be financial or other professional investors with a venture capital or a private equity hat on. These days, you may be supported by crowdfunders, again either direct or via a web platform. They might even be a bank or other lender following a debt for equity swap.
Whoever they are, each will have an agenda and these may be significantly different within the overall shareholder group. They may be looking for capital growth or an income stream. They may want top line revenue or market share increases, or only be interested in bottom line profit performance. They could have a limited time horizon, indeed they may have invested with a pre-conceived idea of their exit route. Their objectives may not necessarily be either reasonable or achievable.
Wherever they are coming from, management needs to know their expectations and recognise that these may change from time to time. It is equally important that shareholders are made well aware of management’s agenda.
Shareholder agreements
Creating a shareholder agreement to regulate the relationship of shareholders with the company, or a variety of such agreements for different classes or types of shareholder is well worth the effort. These documents can be used to agree and define the respective rights of all parties, taking into account their individual circumstances. Most important of all is that such agreements contain an agreed mechanism for resolving disputes.
A well-constructed agreement with pragmatic ‘circuit breakers’ for disagreements are a much better option than relying on the ‘one size fits all’ provisions of the various Companies Acts and related legislation, never mind the nuclear option of going to court.
You may also be interested in: Bringing in an outside equity investor? The key issues to think about.
Communication with shareholders
Shareholders need regular updates from management, sharing not only successes but also being open about bad news, problems and proposed solutions.
Information provided to shareholders needs to be proportionate, giving them enough data to assess progress and come back with questions about any areas that concern them, but not overwhelming them with reams of impenetrable figures or dense, jargon-laden reports. Asking at the outset what information shareholders want to have and how often is wise, as is checking regularly if they are happy with what they are receiving.
Agreeing workable formats for shareholder communications
A particular problem encountered by management teams with sophisticated professional investors can be a requirement to provide financial data in a format acceptable to the investor, but one different to existing reporting routines, creating the irritating extra burden of the ‘two sets of management accounts’ syndrome. This needs to be thrashed out at the start of the relationship and a workable compromise reached, if possible.
Directors as shareholders
Some of the most poisonous disputes are those between fellow board members, either where both sides are actively engaged day-to-day in the business or where one side have executive roles and the other are non-executives. Similar problems can occur between ‘local’ directors of a subsidiary with a minority equity interest and those nominated by its parent company.
Recognising quickly when these cannot be resolved amicably and turning to independent mediation or even a professional arbitrator in more serious cases is vital before the issues fester and affect the running and the viability of the business.
Dialogue, dialogue and more dialogue
The bottom line for management teams is that communication with shareholders needs to remain open and honest. At the end of the day, management are working with the shareholders’ money and have clear fiduciary duties to them. By far the best approach is to maintain regular, open and constructive dialogue with them, especially when things are not going well – after all, they may be needed to provide extra funding at such times.
How we can help
We have extensive experience advising Directors and management teams, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.