Shareholders Agreement 101: Resolving Disputes Among Shareholders (Part 3 of 10)
By Joanne Hue, Updated: 2023-03-13 (published on 2023-02-06)
Many challenges arise while running a business. As shareholders have shared ownership of the company, often a conflict of interest might arise. Resolving these issues without impacting the business is important to resolve these disputes promptly before it has a detrimental impact on the business.
Disputes have damaging impacts on businesses as they result in the breakdown of important relationships. This tends to be costly to the business experiencing the dispute. However, shareholder disputes are more common than what is preferred by the companies. Conflict resolution in the company is key to avoiding the damaging impacts perpetuated by shareholder disputes.
Types of Shareholder Disputes
Disagreements can creep up on shareholders from a variety of sources. There may be conflicts arising over the direction of the company or product. Similarly, from underperformance or low involvement of one shareholder not to the satisfaction of the other. These will catalyze conflicts.
The appointment of directors is also an important matter for a company. Shareholders may disagree with the appointments and the amount of director compensation. Furthermore, if the shareholders are seeking investments, friction amongst the team is likely to harm the company’s ability to fundraise.
Financial issues may also trigger disputes between the shareholders in the company. If a majority shareholder is planning on transferring or selling their share at a certain price, the minority shareholders are compelled to compromise at the same rate in case of a tag-along clause. This may cause dissatisfaction among the shareholders. Furthermore, decisions concerning debts may also trigger disputes between the shareholders.
How to resolve a shareholder dispute?
A shareholder’s agreement plays an important role in avoiding conflict between the shareholders of the company. By the process of defining procedures to handle disputes, a well-written shareholders’ agreement can help avoid or at least reduce disagreements between shareholders. If disputes do arise despite it, the agreement can be used to refer to the outlines that are laid to resolve it. By defining the steps and timeline for resolving the problem, dispute resolution rules safeguard the business’ uninterrupted operations. The shareholders’ agreement also plays a crucial role in avoiding legal conflicts. It helps resolve the dispute without the assistance of the court. Essentially, a well-written shareholder’s agreement can help the conflicting parties avoid binary conflict.
If the dispute is of a small scale, it can easily resort to a voting procedure. The shareholders are mandated to agree with the results of the voting as per the principles laid out by the shareholder’s agreement. However, in some instances, the owner of the company is divided in half. In this case, voting is not an efficient method of dispute resolution. smaller disputes can be settled at board meetings by majority vote or shareholders meetings depending on share ownership. In similar circumstances or cases of a more serious dispute, the shareholders can resort to mediation.
Mediation requires a competent and impartial mediator. A good mediator will assist the parties with process management and aid them to negotiate and reach a resolution. When appointing a third party to provide financial expertise in a relevant dispute, the shareholders’ agreement should be referred to as it may propose arbitration as a binding way to resolve disputes. In addition, the shareholder’s agreement may stipulate the preferred form of mediation. A well-drafted shareholders’ agreement should detail the process of appointing a mediator or financial expert. In addition, the shareholders’ agreement should outline how the mediator or financial expert will be selected.
In case the dispute worsens to cause detriment to the company, the shareholder’s agreement should address the circumstance in which the shareholder does not reach an agreement. The shareholders’ agreement may specify how the company or individual shares should be sold provided a dispute worsens to the point where the shareholders can no longer cooperate. A shotgun clause or a buy-sell clause enables one shareholder to offer to buy the shares of another shareholder at a fixed rate. Alternatively, it allows them to sell their shares to the other shareholder. In this case, the shareholder who receives the option has the option to either accept the offer and sell their shares or buy the shares of the co-shareholder. This allows the conflicting parties to properly exit the company without causing further harm to the shareholders and the company’s interest.
The dispute section of a shareholders’ agreement has similar mechanisms to the pre-nuptial agreement. To avoid disputes, the optimal time to ensure the shareholders’ agreement comprises clauses necessary to avoid and settle conflicts is when relationships between the shareholders are good. With the awareness of these provisions, each shareholder will try to avoid or minimize disputes.
Shareholders share ownership of a company and oftentimes have conflicting interests. These give rise to disputes. If a dispute is not resolved properly within the company, it has damaging impacts on the company’s operation. In order to prevent the escalation of the dispute, the shareholder’s agreement should be properly written, addressing the circumstances in which alternative dispute resolution mechanisms are applicable. Companies can also seek assistance from mediators in order to mediate conflict between shareholders. All these provisions ought to be clarified in the shareholder’s agreement to disincentivize disputes between shareholders.
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