Few people partner in a company with the suspicions that they would end up in a dispute with their fellow partners. However, you must recognize that shareholder disputes are real, and that a breakdown in trust can happen in any company.
To mitigate the downsides of such disputes, a well-drafted shareholders’ agreement can provide guidance whenever shareholders lock horns. It can help you avoid expensive litigation and keep the business safe from shareholder issues.
We spoke with a seasoned lawyer – John Shingleton – about shareholders disputes and here’s what he had to say.
A Solid Shareholder’s Agreement Is Vital for Any Company
People seldom pay attention to the possibility of shareholders’ disputes or what might happen to the company if things go south. But things change. Pressures arising from an overly successful business, or struggling one, as well as changing personal circumstances (like a shift in personal priorities) can lead to tension. Eventually, the tension could result in shareholder disputes which can threaten the business. These are, of course, unforeseen circumstances. Nonetheless, they are not all necessarily unforeseeable.
Shareholder disputes often concern a company’s governance. Therefore, it is prudent to engage a legal professional who is objective to help in identifying and mitigating the risks of a fallout. One way to help avoid potential shareholder disputes is by establishing a solid shareholder’s agreement. John says, “Shareholder agreements are key to how people in business regulate their relationship and joint venture. A good shareholder agreement will contain agreed mechanisms for dealing with disruptive events such as death, sickness or material disputes as well as how to share the load and profits of the venture.”
Components of a good shareholders’ agreement
A good shareholders’ agreement sort of lays down the law on how to deal with the sort of issues that could come up when shareholders are at loggerheads. A well-drafted shareholders’ agreement addresses issues such as:
- The board’s composition.
- Shareholders’ rights to appoint directors.
- How to resolve deadlocks.
- Dividend matters, and
- Policy issues such as share valuation.
Legal Experts Will Help You Proactively Plan for The Unthinkable
As we mentioned earlier, when things are going well it’s hard to think about possible fallouts or even remain objective. But this is exactly why you should engage an objective legal professional to help you proactively plan for the unthinkable.
Some of the most common issues may seem trivial but it’s the little foxes that destroy a garden. John reckons that the most common trigger for shareholder disputes is “failure to communicate with each other in a frank manner and failure to front foot any potential areas of disagreement”
Communication breakdown may not be obvious to you. But there are often signs which may include the following:
- Members are agitated during meetings;
- Sudden silence from previously active members (probably they would be considering their options whilst taking legal advice);
- Claims by some members to be acting as representatives or in the interest of other members;
- Accusations that dissenting members are either in conflict, negligent or breaching their fiduciary responsibilities.
In the light of such manifestations, John explains that “I have found that often allowing issues to fester instead of dealing with these in a civil but full and frank manner causes fundamental breakdowns.”
Practical Ways Legal Experts Help to Avoid Shareholder Disputes
Shareholder agreements are great tools. But as John explains, there are different instruments which legal experts can use to help you avoid shareholder disputes including the following:
- Letters of wishes for Trusts
- Good insurance cover
- An Estate and asset ownership plan
- Management contracts
- Personal Guarantees and Indemnities
- Performance Bonds
- Employment Policies
- Health and Safety and general compliance plans
A shareholder agreement can make it possible for business owners to resolve disputes even where there are no formal contracts. For instance, it can set the stage for a qualified legal professional, such as a business lawyer, to be appointed as an independent arbitrator who can make binding decisions. Alternatively, is can set the terms for appointing a mediator to facilitate negotiations whenever there’s a deadlock.
From his vast experience as a lawyer, John concludes with a piece of advice to entrepreneurs and business leaders. He says “Plan, plan, and plan.” Reaching out to a legal expert for help is vital for the company. You’ll be taking pragmatic and proactive steps to ensure the survival of your company.