How to solve a dispute with shareholders
When a disagreement turns to dead lock it’ s vital to settle differences before damage to the firm becomes irreparable
Shareholder disputes can be thorny, but to suggest you resolve them by resorting to Russian roulette or a Mexican shootout may seem extreme.
However, these are methods for disputing shareholders to agree a share price so one party can exit.
When a dispute arises, creating a deadlock in decision-making, the difficulties can escalate to the detriment of the company.
It is therefore vital the shareholders consider ways to break the deadlock before the damage to the company is irreparable.
A way in which shareholders can build a solution is to appoint non-executive directors or to issue a ‘golden share’ to an independent third party who could only intervene in a deadlock scenario, although there is likely to be debate surrounding their selection.
The parties may refer the matter to an external expert or arbitrator, with the findings of the expert or arbitrator binding on all parties.
This can be both expensive and time-consuming. Further, it will only be useful in determining matters of fact, such as if there are sufficient profits or reserves to discharge dividends sought.
This avenue will not be appropriate where the dispute has arisen out of a difference on opinion.
Mediation is another forum open to tussling shareholders. It is differentiated from arbitration, wherein the independent mediator has no power to impose a resolution.
This may be preferable to those involved as they retain some control of the outcome, but following from this, mediation will only be effective if those involved are willing to compromise to reach agreement. If not, the deadlock will continue.
A shareholder may acknowl- edge it is necessary for them to take a step back from their day-today involvement and transition to a sleeping partner, but it is more likely that one party will buy out another.
Agreeing the share price can be the most contentious issue. Shareholders may appoint an expert to determine the share price, which in itself can cause difficulties in agreeing which variables are to be considered by the expert.
Russian roulette is a method of agreeing a share price. The first shareholder who chooses to ‘draw’ makes their offer. The second shareholder has a limited time to accept, or alternatively they offer to purchase the first shareholder’s shares at that same price.
This introduces an element of fairness as the party that invokes the procedure must be willing to accept the share price set, in the event the second shareholder elects to purchase their shares.
In comparison, a Mexican shoot-out involves submitting sealed bids. The highest bidder lands the shot and can buy the other shares at that price. This can produce an unfair outcome when there are uneven arms, as the person with greater means will undoubtedly win.
Failing agreement, the only options available are to sell the entire share capital or apply for the company to be wound up and distribute the assets thereafter. This ‘nuclear’ backstop should force the shareholders into compromising to break deadlock before such measures are necessary.
Often legal advice is only sought after things have gone wrong. Putting a shareholders’ agreement in place can help navigate the strategy the shareholders wish to adopt to break deadlock. There are a myriad of legal and tax implications at play when negotiating the way forward. The best artillery is to obtain specialist advice as early as possible.
Rachel Toner of Worthingtons Solicitors regularly acts on behalf of companies in corporate matters. If you require advice please call 02890434015 or email Rachel[email protected]thingtonslaw.co.uk
Obtaining legal advice as early as possible is recommended when trying to resolve deadlock between shareholders
Byracheltoner, Corporatesolicitor @Racht_worthsol