Shareholder disputes can arise for a number of reasons: perhaps you and your business partner disagree about the direction of the company, or you don’t feel they’re pulling their weight; or maybe a personal dispute has spilled over into the business. Whatever the reason for the dispute, these scenarios have a lot in common: they’re all stressful, and, if not addressed swiftly, can seriously impact the business.
If you fall out with a co-owner, matters can escalate quickly – and often unnecessarily – if you can’t resolve the issues between you promptly. And as strong differences can ultimately lead to the departure of one or more partners, it’s important to take legal advice on your options. Our team of dispute resolution lawyers can be trusted to navigate through all kinds of situations: from large-scale shareholder disputes to disagreements between business partners within SMEs.
This blog is not a substitute for legal advice; instead, it covers some key considerations that you might wish to think about in the event of any dispute. Your chosen lawyer will be able to discuss these issues in more depth when coming up with a resolution strategy.
How to Resolve Shareholder Disputes, #1: Remove Ambiguity
One of the most common issues faced by businesses is a lack of proper documentation about everything from ownership of the business to management roles and shareholders’ rights. If the co-owners’ legal position hasn’t been recorded from the outset – and again whenever things change as the business develops – uncertainty about the parties’ rights and responsibilities can complicate matters in the event of a dispute.
Not having shareholders’ agreements or contracts in place is commonplace and understandable, even if it’s not advisable. It’s common for businesses to be set up by friends; trusted colleagues; and even married couples. Such informal arrangements often work out – but if you do fall out down the line there is scope for a dispute over what your roles and responsibilities are, who owns what and, indeed, whether you have ownership rights at all.
Ownership can be a murky area, particularly if the conditions around shares and share options aren’t documented properly and understood from the start. For example, many companies give their management teams share options which vest gradually. Unless the terms have been clearly documented, an executive might believe that they possess a certain shareholding while the company believes that it won’t be theirs until they’ve been with the business for a defined length of time. Such issues can be difficult to resolve without clear documentation detailing who owns what.
Amidst the buzz of starting up a new business, entrepreneurs might not want to waste the time and money on investing in corporate documentation. There’s an emotional slant to this, too: it can feel presumptuous or like a ‘jinx’ to be putting safeguards in place before the business has gotten off the ground. However, taking the time to do this at the outset, and making sure you update these documents whenever there are changes is extremely worthwhile. Not only will this provide protection in the event of a dispute, but it will also provide the clarity around ownership of the company which will be required by any future investors in the business.
If you don’t have documentation…
If there is nothing concrete in place, we’d need to look at any and all contemporaneous written evidence as to what was agreed: from emails to WhatsApp messages. Such investigation can be time-consuming and costly; moreover, there’s usually room for debate around what informal messages really meant, so this kind of evidence doesn’t provide the same sort of clarity as a detailed signed agreement. Not an ideal scenario. Our advice would always be to document the legal position from the outset: whilst it’s an initial cost, it could save a great deal of time, money and stress in the long run.
How to Resolve Shareholder Disputes, #2: Valuing the Business
Should you find yourself embroiled in a significant dispute with a co-owner of a privately owned company, it’s entirely possible that one of you will end up exiting the business. In this case, the value of the organisation will play an important part in any settlement. This figure can be difficult to settle on: it’s not something you can agree at the inception of your business, as a new company isn’t worth anything. Listed businesses are priced according to the stock exchange, but it’s much harder to determine what a private company is worth.
What to do, then, in cases where the value of a company is not clear but the only way to solve a dispute is for one of the shareholders to buy the other out? One option is to seek advice from one or more impartial, expert valuers. Another is to investigate whether the company has ever received – or sought to receive – external funding. If this process has been undertaken, a figure will have been attached to the company as part of the process. In small businesses, valuation may need to reflect reliance on key individuals who can’t readily be replaced; the fact that a shareholding is a minority one; and perhaps the absence of a liquid market for the company’s shares. Each party will have their own subjective view – with the seller wanting to maximise the share price and the buyer looking to diminish it. Bear in mind that start-ups – with their potential for both exponential growth and abject failure – are particularly difficult to value, so it’s worth thinking carefully if you’re in danger of falling into a dispute and your business is very young.
Ultimately, the best course is nearly always to take a commercial view with both parties prepared to negotiate and compromise. If you really can’t come to an agreement, there are only two outcomes: a deadlock situation or litigation.
How to Resolve Shareholder Disputes, #3: Deadlock or Litigation
It’s our belief that negotiated settlement is often – though not always – the best option in cases of shareholder disputes. Litigation is not only expensive, but also prohibitive to a company’s progress: it can be very distracting for management; it impedes a business’s ability to take investment; and poses a reputational risk.
We will always fight for our clients’ best interests, however, and where appropriate we have litigated such matters (and very successfully). There are times when a litigation strategy achieves the best possible result. For example, if you find yourself in a deadlock situation with another shareholder and there’s no compromise to be reached, the value of your business can be destroyed – and quickly. For every day that goes by in a deadlock, the business isn’t growing or advancing. In addition, staff morale can be severely affected – which ultimately will hamper productivity – and suppliers and clients could lose confidence in the brand.
To protect and preserve the integrity of your business, it’s vitally important to take solid legal advice before the dispute has had a chance to escalate. In advance of meeting with your lawyer, think carefully about your ideal scenario: are you aiming for a commercial deal? Do you wish to walk away completely, or do you want your partner to exit the business? Or are you certain that litigation is the only solution? Having an idea of your own expectations and desires will be useful for your legal team, and you’ll feel more comfortable and confident in your choices if you’re able to get your thoughts together before the dispute has had a chance to drag on. At this time, it might be useful to read our introductory blog, ‘You fall out with a business partner: what to do?’, as well as the helpful guide, ‘How to Exit a Senior Executive’, for further insight.
Whatever the nature of your dispute, do get in touch with Bellevue Law without delay. Our team of expert lawyers are ready to help with a wide range of employment matters, from shareholder disputes to ownership disagreements. Please contact us so that we can arrange an initial no-obligation discussion to see if we’re well placed to assist.
Disclaimer: this material is a general overview only, and is not intended to provide legal advice.