Shareholders’ Agreements Part 5: Dispute Resolution
Chris Lee, Evie Martin, Ruby George, Ana Cheetham
This article is part of our series, "Navigating Shareholders' Agreements: Your Business Toolkit," offering practical insights to help strengthen your business’ foundations.
Shareholders’ agreements should, but often don’t, have adequate clauses to deal with disputes. Here’s a quick explainer on 3 x essential dispute resolution tools that every good shareholder agreement should have, including some ‘hero’ clauses when all seems lost.
Communicate Better
Good shareholder agreements mandate regular meetings and reports on a business’ performance operations, financial status, challenges and opportunities. These keep key stakeholders informed about the business, hold management to account and help to build transparency and trust. In turn, they should reduce the chances of disputes arising.
Mediation and/or Arbitration
If, despite best efforts, a dispute does arise, before escalation to a formal “process”, it can be incredibly helpful to have a set period in which nominated representatives from affected shareholder(s) attempt to find a resolution through discussions. If that is unsuccessful, then a formal submission to mediation is a useful next step. This private/confidential process should see a neutral third party, with expertise in the area of the dispute, facilitating a discussion to help parties reach an acceptable compromise. Alternatively, or additionally, referring the dispute to arbitration involves a court-like process, but private/confidential, which produces a binding decision from a third-party arbitrator(s).
‘Silver Bullets’ for Deadlocks
If dispute resolution processes become drawn out or shareholders are otherwise deadlocked, it is essential to have ‘silver bullet’ provisions to ‘fix’ broken shareholder relationships by facilitating a swift corporate ‘divorce’. “Russian Roulette” clauses allow a shareholder to signal they wish to sell all their shares to the other(s) at a chosen price. The other(s) must either: accept and buy from; OR instead sell all of their shares to, the 1st shareholder at that specified price. Alternatively, a “Texas Shootout” requires all shareholders to make bids to an independent auctioneer. The highest bidder buys all the shares of the other(s). “Put and Call Options” for fair value provide similar solutions.
Interested in a robust shareholders' agreement that includes comprehensive DR clauses? Looking for advice on how to amend an existing agreement to better manage conflicts? Get in touch with our team for expert guidance.
