MT Expert - Legal: Solving shareholder disputes

The tensions that were simmering have finally erupted and now the office resembles a battlefield. How do you put the pieces back together and get on with running your business?

by Richard Wadkin
Last Updated: 17 Jun 2011
In the excitement of starting a new venture few entrepreneurs envisage having difficulties with their new colleagues further down the line. However, just like a marriage, relationships which once held a business together, can fall apart.

With the bond of ‘common good’ dissolved, and with significant sums of money involved, it’s all too easy for disputes to get personal or even bitter. The aggrieved party may well resort to turning to the law in order to protect their position and once the Courts are involved, judgments could range from winding up the business to ordering the rest of the shareholders to buy out the aggrieved party’s shares.

To avoid this type of messy and protracted ending (the phrase ‘corporate divorce’ hasn’t come about for nothing) some businesses choose to put in place a shareholders’ agreement which sets out a mechanism for resolving disputes.
However, for now we’ll assume the business in question hasn’t got a shareholders’ agreement and tensions are rising. What do you do then?

Well, the first rule of thumb is to seek advice immediately and find out the legal rights of everyone involved in the dispute.  This doesn’t commit you to legal action but it does mean you’ll know where everyone stands thereby avoiding complications further down the line.  An advisor will also help you create a strategy to help you achieve your preferred outcomes.  

With disputes of this nature it’s vital to remember that one person can be a shareholder, a director and an employee. This means that different aspects of the law come into play depending on which ‘hat’ an individual is wearing, therefore it’s advisable to choose a law firm which has specialists in commercial dispute resolution, employment and corporate law.
At this stage it’s also important to take stock of both your own and the other side’s situation; ask yourself:

•    Are you in control of the board?
•    Are you in control of shareholders’ meetings?
•    Have you met (and been seen to meet) your obligations as a director?  
•    Do you know what rules govern the sale of shares?
•    What’s motivating the other side?
•    What are they trying to achieve?
•    What might they compromise on, what are the deal breakers?

With the background work done, you’re then in a strong position to start negotiations which are almost always the quickest and cheapest route to reaching a resolution. Use your legal rights as bargaining chips and agree practical steps towards resolving the dispute. At this stage you may want to consider using a neutral mediator who can see past any personal issues and ensure commercial reality remains central to the agenda.

If negotiations fail you will need to consider the least painful way to part company with the other party. This may involve asking the other shareholders to buy the departing shareholder’s shares or negotiating other solutions with the help of your advisor.

You will also need to make a ‘reasonable offer’ to the other side - this is an important step which will put pressure on the opposition and potentially protect you from the costs of proceeding. Taking sound legal advice at this stage is very important – your offer should be both tactically astute and procedurally compliant, or you may face difficulties further down the line.  

Finally, if a shareholder leaves your company or the dispute ends up in court, it may unsettle employees, customers and suppliers. Consider the effects on each of these groups and then develop a strategy to ensure any impact is minimised and then set your sights firmly on the future.

Richard Wadkin is partner and head of commercial dispute resolution at law firm Shulmans LLP.

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