Shareholder disputes: How it affects your business and how to prevent it
Shareholder disputes are disagreements between shareholders. It may concern the governance of the company, or other essential elements such as the company’s processes or finances amongst others. The best way to prevent shareholder disputes is to have in place, a clear and robust Shareholders’ Agreement, right from the start.
How can shareholder disputes affect your business?
Around the world, there are many cases where individuals start a business with friends or colleagues. They (or some of them) agree to be the company’s directors. Depending on their degree of involvement, they will each (as shareholders) hold the shares equally or in different proportion.
Even when successful, there may be mounting tensions since all shareholders have some financial interests in the business. Unlike a normal business dispute, tensions will probably be higher and the causes of the dispute may be more complex. These include:
- the breach of the Shareholders’ Agreement;
- disagreement over the company’s direction and management;
- difficulty to agree on a resolution;
- deteriorating personal relationship; inequalities in compensation or contribution;
- conflict of interest;
- different visions; or
- lack of performance of a shareholder or a director, amongst others.
In a dispute where shareholders get into conflicting differences, the business is at risk and they reach a “deadlock” situation. A “deadlock” occurs when, in the absence of consensus and approval, shareholders do not agree on resolutions. If the board (or company secretary) does not act quickly, the business may consequently face extended and expensive periods of adjustments, without mentioning the valuable time and financial loss caused by lengthy disputes.
What are my rights as a shareholder?
In Mauritius, the section 9 of the Companies Act 2001 outlines the shareholders’ rights and obligations, as well as the scope of the company secretary. However, the governing documents of the company remain the primary source in a case of shareholder disputes.
Foreseeing and providing for dealings with “deadlock” situations in advance will avoid potential complications and save time and legal costs. Providing for a ‘disputes resolution mechanism’ in the Constitution of the company or in a Shareholders’ Agreement might also help avoid such situations.
The Shareholders’ Agreement: a primordial document to prevent shareholder disputes
In case of a dispute amongst the company’s shareholders, the first step is to review your Shareholders’ Agreement. The document shall state whether there is a method of resolving the dispute, and set out the procedures to follow in case of a dispute between the shareholders.
The Shareholders’ Agreements often have a dispute resolution clause, to which the parties must abide by prior to starting any legal action. This includes alternative dispute resolution methods – such as mediation that involves an impartial third party – that aim at facilitating the resolution of the dispute.
The Shareholders’ Agreement addresses important aspects such as:
- shareholders’ rights;
- the option of enforcing these rights;
- administration and control of the company;
- funding structure;
- voting rights;
- terms on transfer of shares;
- exit strategy;
- dividend policy;
- dispute resolution;
- what constitutes a “deadlock” and the operation of the relevant provisions in such a case; and
- share buy-back and winding up.
In the absence of a comprehensive Shareholders’ Agreement, you should inquire whether the Constitution contains any provisions that may either help or provide direction regarding the way to resolve the dispute, or to help define the parties’ obligations.
Whenever existing provisions are unsuccessful in helping to reach a decision, the last (and most costly) option will be through Court. Any aggrieved shareholder may bring the case to Court to claim his/her rights, to seek relief or to wind up the company.
What are the steps to avoid shareholder disputes?
There are many ways and means to prevent shareholder disputes. This will not only facilitate the resolution process, but will also make it less time consuming and costly for both the shareholders, and the company. The points to consider include:
- hiring an external director;
- looking for early legal advice in advance of a potential dispute or allegations of prejudice;
- ensuring Constitution documents are clearly understandable and complete;
- considering whether Constitution documents need updating;
- ensuring Shareholders’ Agreements are effective, comprehensible and comprehensive;
- ensuring all directors know their duties under the Companies Act 2001;
- considering obtaining the valuation of shares in an agreed timeframe;
- considering buying-back the shares of a particularly troublesome shareholder;
- appointing third parties who can provide a more stable and safe atmosphere for negotiation / mediation.
It is essential for a company to have well-drafted and clear documents that guides shareholders during the resolution of disputes, if any. Shareholders should take the time to devise preventive measures that aim to avoid causing financial and moral damage to each other and safeguard the success of the business.