Introduction – Disputes Among Shareholders
In our earlier articles we set out the benefits of a Shareholders Agreement and how decisions can be controlled under a Shareholders Agreement. This article will be focused on the issue of disputes amongst shareholders and how they can be addressed as part of the Shareholders Agreement.
The small business and family enterprise count for more than ninety-seven percent (97%) of the total number of businesses in Australia.[1] The majority of those business are structured as a company.[2] As the preferred vehicle for family businesses, the company is the structure around which the family unit work together to create wealth and potentially strengthen the family bond. However, when there are disputes within the family unit the result can spill over into the business operation and vice versa. In circumstances of such family dispute, the results can not only impact the family unit but also the value of the business.
Drivers of Shareholder Disputes
The drivers of disputes may relate to company/business issues but can often be driven by personal and/or non related business issues. Examples include martial discord; succession issues especially where a departing parent has previously controlled the Company; sibling rivalry and intergenerational viewpoint differences.
Whatever the reason, where a shareholder dispute arises, there is a real risk that minority shareholders may be vulnerable to opportunistic behaviour of majority shareholders. Those ‘behaviours’ may involve:
- Exclusion from management;
- Dilution of minority shareholding;
- Excessive remuneration paid to preferred family members; and/or
- Misapplication of company assets.
How to Resolve Disputes Via A Shareholders Agreement
If a dispute arises, it is helpful that the shareholders have a range of informal and formal mechanisms to resolve their dispute. Those mechanisms include:
- Informal Dispute Resolution: Examples range from self help remedies, shareholder avoidance, negotiations, mediation and other collaborative practices;
- Formal Dispute Mechanisms: Arbitration, expert determination and/or court based remedies;
- Deadlock Breaking Mechanisms such as ‘mexican standoffs’ and ‘russian roulette’ mechanisms.
The benefit of the ‘informal dispute mechanisms’ is shareholders control their destiny in the manner, process and potential outcomes for resolving disputes. This can be potentially advantageous given that many shareholder disputes are often driven by subjective matters such as misunderstanding, hurt feelings and personality clashes.
The key point is how best to ensure disputing parties have a means to resolve their problems. Absent an express agreement to engage in a dispute resolution process, the disputing shareholders either need to agree the process (which may be difficult if the dispute is progressed and parties entrenched) or otherwise resort to formal dispute mechanisms which may be expensive in terms of the actual costs incurred by all parties, lost opportunity for the parties and lengthy in time.
The simplest way to document the dispute resolution process is via the Shareholders Agreement. The Shareholders Agreement can set out the road map as to how shareholders will resolve disputes should they arise. By agreeing that process before a dispute arises all shareholders (in particular minority shareholders) have a clear understanding and protocol to engage in productive dispute resolution and potentially resolving disputes before they become intractable or value depletive for the business.
Take Outs
Disputes can arise among shareholders for a variety of reasons both financial and non-financial. Disputes can be destructive of both relationships (especially in family businesses) and the value of a business. A properly drafted ‘dispute resolution’ clause in the Shareholders Agreement provides the mechanism for disputes to be resolved earlier and more effectively then would otherwise be the case.
If you would like to discuss a Shareholders Agreement or require more information please contact: Cameron Spanner, Director-Lawyer.
Written by Cameron Spanner.
[1] See https://www.asbfeo.gov.au – “Small Business Counts 2020”
[2] See https://www.abs.gov.au “Counts of Australian Businesses, including Entries and Exits