It is an unfortunate fact of life that not all people who go into business together stay in business together. Time sometimes has a way of converting hope into despair. Shareholder disputes tend to be caused by one or more of the following factors:
- Differing perspectives as to the direction of the business, management style or risk tolerance
- Built-in tensions between active and non-active shareholders regarding compensation of active shareholders and whether or to what extent dividends are paid out to shareholders
- Failure to implement governance best practices
- Failure to comply with previously agreed governance procedures
- Disagreement on approach to succession
- Breakdown in communications or trust among key stakeholders
- Difficult family dynamics in closely-held family businesses
- Catastrophic events such as serious illness or death
The earlier these problems are recognized and properly addressed the greater the likelihood of solving them effectively with a minimum of damage and expense to the relationships and the business itself.
The manner of dealing with these issues varies depending on the situation. Business differences might require the parties to go back to basics through a facilitated strategic planning exercise. Compensation, dividends and governance items are typically dealt with in a Shareholders Agreement. Compliance issues can be addressed by simply reminding the parties what they previously agreed to.
Softer issues involving family dynamics, communications or trust breakdowns are often difficult to resolve as people tend not to want to deal with “the elephant in the room”. In those cases, the intervention of a skilled consultant or psychologist may be required in order to right the ship.
In Part 2 of this series, we look at what happens when these situations are ignored or not properly dealt with and how best to deal with them when a shareholder dispute occurs or is about to occur.