Posted: Tuesday 15 November 2011
Avoiding shareholder disputes
By Austin Flynn
Although my experience of matrimonial work is limited to a four week stint in the summer of 1991, when I was still a trainee in the Litigation Team of a firm in Newcastle, the breakdown of legal relationships is not a mystery to me. I still receive a steady stream of new work that involves me advising on shareholder ‘disputes’. I use the word ‘disputes’ loosely, because the work that I do involves overseeing everything from full-blown fisticuffs, to quite amicable partings of the way. I suppose in that sense, the breakdown of a shareholder relationship is similar to the breakdown of a marriage: no two are the same, they have a variety of causes, and when people enter into one of these relationships they tend to assume that it will last forever. They can also both bring out the less tolerant aspects of human nature, and in my experience of shareholder disputes, a quick, clean-break usually gives the best result.
Although some people do go in for pre-nuptial agreements, they are still uncommon, whereas the company law equivalent (the shareholders’ agreement) is seen quite regularly. Having said that, the majority of shareholder disputes that I see do not have one, and that is a shame: a properly drafted shareholders’ agreement will not only anticipate the kinds of dispute that tend to arise amongst shareholders, but will also contain a mechanism for allowing the parties to go their separate ways with the minimum of fuss. There will often also be an incentive for the parties to settle their differences by discussion (or rather a dis-incentive if they fail to do so, for example the company being wound up).
Whenever I’m asked to advise on a shareholder dispute, my heart sinks when I am told that there is no shareholders’ agreement (the usual reason being that the shareholders were good friends, had known each other ‘since their school days’, and didn’t want to pay for an ‘unnecessary’ document when they started trading). The lack of a proper agreement means that the parties are frequently deadlocked, or tied to each other in an unequal relationship, with no way out unless they can agree what the company is worth. Human nature being what it is, the departing shareholder generally thinks his shares are worth several times more than does the shareholder who is being asked to buy them. Even if there is a shareholders’ agreement containing a valuation mechanism, the amount of time that the parties spend arguing about the break-up can have an adverse effect on the company’s underlying business, so that by the time the dispute is resolved, the company is worth significantly less than it was when the argument began.
I suppose my view of these things is jaded, because I tend only to deal with shareholder arrangements at the outset, when an agreement is being put in place, or later, when the relationship is breaking down: I generally don’t hear about the (no doubt many) companies that trade profitably and happily for years (unless they come to me to raise growth capital, or to buy another business, or to sell their company for a tidy sum). However, there is no doubt that having a proper shareholders’ agreement can give peace of mind, even if it sits in a drawer for years gathering dust. You never know what is just around the corner, and it is much cheaper to pay me for a shareholders’ agreement than to pay me to settle a shareholder dispute; a bit like pre-nuptial agreements and divorces, really.
