In Part 1 of our series, we discussed the common causes of shareholder disputes. In this article, we discuss the three most common approaches to resolving disputes: negotiated settlements, contractual resolutions and litigation. Not all of these solutions are mutually exclusive and different approaches may be employed as part of a process leading to an overall resolution.
1. Negotiated Settlements
A negotiated resolution between parties is usually the first step that parties take to resolve their differences. This approach may or may not include the use of advisors (legal, financial, etc.) and is usually undertaken by the parties when they wish to:
- Avoid costly and time consuming litigation
- Retain control over the process
- Maximize the ability to structure a transaction (e.g. buyout) on a tax effective basis
- Maintain confidentiality of the dispute
- Minimize adverse impact of the dispute on the business
- Maintain, to the extent possible, cordial relationships
A negotiated settlement may result in a number of potential solutions, including:
- A buyout of the interest of one of the parties
- An outright sale of the business to an arm’s length purchaser
- A split of the assets
- A new or amended shareholders agreement
- The establishment of an independent board of directors or advisory board
2. Contractual Resolution
In those cases where there is an existing contractual arrangement between the parties (e.g. shareholders agreement, joint venture agreement, etc.) one or more of the parties may wish to employ the existing provisions set out in the agreement. These may include:
- Provision for arbitration and/or mediation
- A buy/sell clause (commonly referred to as “shotgun clause”)
- Put or call provisions
- Drag along rights in a sale to an arm’s length purchaser
Litigation is usually considered a last resort option in shareholder disputes, and frequently involves claims of oppression and possibly impropriety and/or incompetence on the part of one of the parties.
The party commencing the litigation would ask the court to grant some form of relief, such as a sale, buyout, etc. This may include the appointment of a receiver, administrator, liquidator, etc.
Litigation in the context of a shareholder dispute is:
- Very costly. In high net worth situations, litigation costs can run into the millions of dollars.
- Time consuming. In some cases, shareholder dispute litigation has extended well beyond two or three years.
- Damaging to the business. The distraction of the owners’ time and energy is an immeasurable cost. Litigation also frequently forces employees of the business to take sides, resulting in a deterioration of employee/owner relationships. This often leads to the departure of key employees.
- Once a matter gets before the courts, the allegations become a matter of public record. There will be enough allegations made to make everyone involved look bad.
- Uncertain as to result. Once the matter is put into the hands of a judge, anything can happen no matter how strong one might think his or her case is.
In Part 3, our final segment of this series, we discuss an approach that we employ that avoids / minimizes the risk of litigation.