How to solve a dis­pute with share­hold­ers

Belfast Telegraph - Business Telegraph - - Front Page -

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

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