Dissolving discord: shareholder dispute resolution in the UK
August 2018 | FEATURE | LITIGATION & DISPUTE RESOLUTION
Financier Worldwide Magazine
August 2018 Issue
Even the best business partnerships go through rough patches. However, the trick is to not allow difficulties, such as a dispute between shareholders, to erupt into anything inherently damaging.
The whys and wherefores of a shareholder dispute can vary, but they typically involve disagreements over company strategy. They are also increasingly prevalent. In the UK, for example, shareholder disputes are common. “A key driver for this is the entrepreneurial culture in the UK, which results in start-up companies which can rapidly grow in value,” says Ed Weeks, a partner at Cripps. “Such rapid growth can mean relations between shareholders become strained and interests diverge.”
With the number of companies being formed in the UK continuing to increase (a record 657,790 new firms were launched in 2016, according to UK government data), the extent of shareholder disputes is also likely to rise. “Shareholder disputes can hamper growth and even lead to insolvencies,” notes Jonathan Lea, founder of The Jonathan Lea Network. “The main driver of disputes is a lack of good governance, whereby shareholders fall out over how the company should be managed.”
The first attempt at resolving disputes between shareholders is usually made via articles of association and shareholders’ agreements. “If these are well-drafted they may provide a mechanism to resolve all but the most knotty of disputes,” suggests Mr Weeks. “What you want are clearly structured provisions dealing with shareholder expectations, obligations and exits. An appropriate dispute resolution mechanism – such as expert determination of share valuation on the compulsory purchases of shares or mediation of disputes generally – can prevent disputes from escalating, saving everybody significant time and money.”
A company’s constitution comprises its articles of association, as well as any shareholders agreement. “This is why both are often used,” says Mr Lea. “Within the constitution you can include such provisions as vesting arrangements, good and bad leaver clauses and other forced buy-back mechanisms, as well as clear procedures on how certain key decisions are made. The sum effect of such well-considered and drafted terms is that disputes are avoided because resolutions have effectively already been pre-agreed.”
In many instances, mediation is a suitable port of call, especially when a company’s survival is the priority of all shareholders. “Mediation is a formal and flexible process under which a skilled and experienced intermediary, the mediator, is employed by all parties to help them reach a settlement,” affirms Mr Weeks. “Most disputes referred to mediation settle on the day or shortly after.”
While more new UK companies may well mean a corresponding increase in shareholder disputes, what is largely beyond doubt, and unlikely to substantially change, are the factors which cause such disputes in the first place.
“The factors remain constant as they are essentially about relationships between people,” says Mr Weeks. “Shareholders fall out because that personal relationship breaks down, or trust and confidence is lost or because there is a fundamental disagreement about the future direction of the business. The triggers can be a company performing well, performing badly or just bumping along. Tensions under the surface between, for example, the world view of an investor versus the world view of a founder, can bubble up at any time. The challenge is to understand the cause of the dispute, as only then can the law or any agreed mechanism be applied to resolve it.”
More often than not, companies neglect to seek good legal advice in respect of establishing protective and secure constitutional documentation that helps resolve shareholder disputes. “Every company needs to ensure that it is clear as to when and how a discordant or non-participating shareholder can be easily bought out, as well as have in place comprehensive provisions in respect of how material decisions are made between shareholders,” advises Mr Lea. “As crowdfunding platforms now integrate secondary market characteristics, in the future there may be more liquidity for shareholders of private companies, although such developments will still need to be adopted by the board.”
Of course, a dispute invariably involves strong emotions, leading to nerves being frayed and reason under siege. Shareholder disputes are no exception. “Priorities are sometimes at polar opposites when emotions come into play,” says Mr Weeks. “One shareholder may express a willingness to take the company down rather than allow others to have it.”
With mediation often being successful in highlighting commercial realities and helping parties to work through their emotional angst, the resolution of a shareholder dispute through this channel can, according to Mr Weeks, be said to be “one part law, one part accountancy and one part psychology”.
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