Running a business in these deeply challenging times is hard enough without adding Director, Board, or Shareholder disputes into the mix. Unfortunately, these disagreements are all too common and at their worst, they paralyse companies and can destroy them.
What matters most is not the rights and wrongs of the argument, but admitting that the problem is something more than a routine disagreement, not letting it fester and being proactive in seeking a solution as quickly as possible.
Types of boardroom and shareholder disputes
Boardroom and shareholder disputes can arise for many different reasons. Examples include:
- disagreements over the direction and development of the company;
- personality clashes, uncontrolled egos or just poor personal relationships;
- conflicts of interest, usually because a director or shareholder has an interest in another business;
- perceived under performance by a director;
- the terms of directors’ service contracts;
- concern over whether the board is meeting its legal responsibilities;
- competing agendas on directors’ pay and dividends.
Getting ahead of disputes: mechanisms for their resolution
Anticipating the risk of boardroom and shareholder disputes in advance in a company’s articles of association or a shareholders’ agreement can save a huge amount of time, money and aggravation. Many SME and start-up companies are governed by the default model articles of association, which give the Chairman of the Board a casting vote in the event of a deadlock at board level, but contain no provisions to resolve disputes which might occur between Directors or Shareholders.
This is why it is advisable to have a separate Shareholders’ agreement from the outset, or alternatively, if that is a formality too far, then how the company is to be run and what each Shareholder can do in various situations in the future should be discussed in advance. This can highlight potential flashpoints at an early stage.
A provision to deal with intractable disputes through mediation can be worth its weight in commercial gold. Mediation, using a neutral independent, can help avoid a dispute escalating and eliminate the posturing and position-taking which so often gets in the way of finding a solution which protects the business.
If mediation fails, the articles or Shareholder agreement may also set out a mechanism for the Shareholders to part company. Examples are for the aggrieved Shareholder to have the right to require the others to buy them out at a fair price; or each side must offer to buy the other out, with the one offering the highest price can buy out the shares of the other.
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Taking early advice
Boardroom or Shareholder disputes escalate because the parties fail to find out precisely what their legal rights are at the outset or what their options are for enforcing them. The later advice is taken, the more time and money will be wasted sorting out the dispute and the more damage the business will suffer. It pays to act at once.
As a first step, it is vital to know and understand the provisions of the company’s articles of association and any Shareholders’ agreement. It may not necessarily be appropriate to get advice from the Company’s existing advisors. Independent advice can be crucial.
Keeping boardroom and shareholder disputes out of the courts
Litigation may well be the only way to settle a dispute, but the risks and costs must be weighed carefully before going down this route. This is not an option for the faint-hearted with its uncertainties and potential delays and should not be chosen without prior input from experienced and hard-headed legal advisors.
Valuations and financial due diligence
Even an amicable resolution of a dispute may require the preparation and use of financial and valuation data, either to establish the rights and wrongs of the parties, or as the basis for an agreed settlement. Where matters end up in court, these will be essential. Here too, using independent forensic experts will almost always be the better option, rather than relying on professionals who may already be too close to the matters under dispute or to one of the parties.
What if the Company cannot survive the shareholder disputes?
The damage caused by warring Directors or Shareholders may mortally wound the company, or else the only agreed way forward may be the break up of the business and its distribution between the parties either in specie or in cash. Either way, a formal restructuring process is likely to be needed, preceded by independent advice provided by appropriate legal and insolvency professionals.
How we can help
We have extensive experience in working with business and stakeholders to help to resolve these types of disputes and we will always work with you to find the best solution for 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 firstname.lastname@example.org or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.