Litigation avoidance and resolution typically focus on disputes between businesses. However, litigation and disputes within companies, between their shareholders, can also arise in many ways and deserve some consideration before they do. Such disputes can escalate and have a devastating impact on the operation and success of a business. It is therefore important to plan ahead so that businesses and their shareholders are well-placed to prevent and resolve their disputes in ways which minimise their impact.
Prevention is Better Than Cure
A well drafted shareholders’ agreement can prevent issues arising in the first place. Starting a business is typically a time intensive venture. At the outset, typically we see that the commercial aims of the business are prioritised over its internal mechanisms. In particular, when businesses are set up between friends or even family no trouble is foreseen for the relationship. However, circumstances change over time and a shareholders’ agreement can prevent problems arising in the future. For example, minority shareholders can find decisions made without their input and, vice versa, a majority of shareholders may find the sale of the company blocked. Without an agreement put into place with respect to shareholders’ powers and rights, resentment and tensions can rise quickly.
A shareholders’ agreement can specify in more detail the positions of the parties and regulate the conduct of the business so as to compliment the company’s articles of association. For example, it can address the necessary requirements for decision making, matters requiring shareholder consent, and the dividend policy of the business. Procedures surrounding the transfer of shares, including pre-emption rights and exit obligations, can also be put into place. The agreement can also include restrictions on the shareholders being involved in other competing businesses.
Ownership of Business
Disputes can arise in relation to the ownership of businesses, particularly start ups, and alleged promises or understandings about the allocation of shares. These issues tend to come to the fore when a business is successful and there is a dispute regarding who should share in that success. Individuals should document and formalise all their dealings in respect of the ownership of shares, so that there is no dispute in the future regarding the basis on which businesses are owned.
Address The Issue Early and with Independent Advice
Once a shareholder agreement emerges, it is better to obtain early advice, before the issue becomes more corrosive. Early reference to the shareholder obligations, as contained in a bespoke agreement, can help define the ways in which the parties ought to conduct themselves. More time and money tends to be needed when resolving an issue once it has already escalated beyond an initial concern.
It would be sensible to instruct a solicitor who does not act for the company. The company may require its own advice in respect of the issue which is the subject of the complaint and the company solicitor may therefore be conflicted from acting for one of the individual shareholders.
Dispute Resolution and Mediation
In companies with potential deadlock situations (such as a 50:50 business owned by two shareholders), the parties can be assisted by including in their shareholders’ agreement a dispute resolution clause. A solution should be sought which ensures both parties can continue to work together professionally and for their mutual success. A structured mediation or other alternative dispute resolution procedure can help the parties achieve their objectives.
If you are worried about a shareholder dispute and the potential impact on your business, please contact our team on 0800 131 3355.