Much like a relationship, when venturing into business with others, you place trust in your fellow shareholders. When this trust is breached, or broken, the effects can be significant.
Shareholder fallouts can become toxic and cause a wide range of issues within a company. Profitable businesses are jeopardized when harmony on the board is not kept.
Shareholder’s judgement becomes affected, and it is possible that actions and decisions are influenced by emotion rather than logic.
What Causes Shareholder Disputes?
Shareholder disputes can have many causes.
Common causes include shareholders not agreeing on the direction of the company, personal disputes between shareholders, financial benefits and remuneration, as well as disagreements between shareholders for not pulling their respective weight in terms of the company moving forward.
Ways to solve Shareholder Disputes:
Shareholder disputes are not always avoidable. However, there are measures that can be taken to mitigate the chance of them occurring and/or escalating.
- Shareholder Agreements:
Shareholders can agree to sign a shareholder agreement in which they outline the following:
- Their responsibilities as shareholders
- Details on how the business will be managed
- How to deal with disputes/disagreements
- Exit procedures for shareholders
Formal agreements can be effective when t comes to minimising disputes. The agreement removes ambiguities and establishes more certainty on how the company is to be run, where shareholders stand, and what should happen if a dispute arises.
Once shareholder disputes arise, the first port of call is to negotiate the issues causing the conflict. This can usually be cost-effective and quick.
Negotiations often result in compromises which leads the company and its shareholders to a suitable solution.
If standard negotiations fall short, then mediation may be another option to address the dispute. Mediation, however, often involves extra time and cost.
- Buyouts/Exit strategies:
If an agreement or compromise cannot be reached through negotiations or mediation, then buying out the disgruntled shareholder(s) may be one of the only options left.
A buyout requires a valuation of the company’s shares, which usually requires an independent party to conduct the valuation due to conflicting perspectives on the value of the shares.
This process is not always quick, and it is not full proof. These shares are required to be purchased for the buyout to be executed. Existing shareholders or external investors may not agree upon the valuation.
A well assembled shareholder agreement should detail any processes for a shareholder buyout.
If none of the above-mentioned methods can remedy the shareholder conflict, then litigation may the only option left. Under Section 174 of the Companies Act, shareholders can seek relief if the business is being operated in such a way that it oppressive, unfairly discriminatory or unfairly prejudicial, and can apply to the Court for assistance.
Litigation can however to be expensive and protracted for the shareholders, not to mention a distraction for the company’s progress.