Can you Find it – Business © 2017 THE FULL STORY…BREAKING UP IS NEVER EASY Published in Can you find it Business Edition on Saturday, October 1st 2015
Shareholders disputes and partnership disagreements rarely make the headlines in the press (unless they happen to involve, say, football clubs, or media personalities). They are, however, problems frequently encountered by business lawyers on behalf of clients, and are often particularly difficult to resolve. Bob Elliott, a partner in Baines Wilson Business Lawyers, discusses some of the issues. Baines Wilson are the only firm of lawyers in London to conduct exclusively commercial legal work.
WHAT is a typical shareholders’ dispute? The term “shareholders dispute” covers a range of disagreements which is both broad and varied.
Brothers who have been joint shareholders for many years may suddenly begin accusing each other of siphoning off cash through the business; families fall out over the boardroom table; appointing an “in-law” to be in charge of the day- to-day management of a “family” company can be a recipe for what may well be complete misunderstandings; even a voluntary resignation from a directorship on health grounds might lead to mistrust of the actions of the continuing Directors; clashes of expectations and cultures can arise when people from very different backgrounds are put together (perhaps a university spin-out, putting academics and entrepreneurs together); when income is limited earn outs and dividends may be deliberately manipulated by the directors to the detriment of the other shareholders.
Partnership disputes do not necessarily represent a rosier picture. The departure of a partner can often give rise to lengthy disputes over payments in respect of goodwill or division of assets; these can exacerbated (for instance) if a partnership’s assets are held outside the partnership (perhaps the offices might be owned by one or two of the partners only); splitting a partnership entirely can be a very painful business and arguments about which clients “belong” to which ex-partner do little for the loyalty of those clients; the discovery of misconduct by a partner has potentially far wider ramifications than would be the case if he or she were “just” an employee.
Very few business areas are immune from such behaviour. The press may, for instance, find a newsworthy angle in a dispute involving the entertainment or media industries, but there is no reason why the same sorts of disputes should not occur in any type of business or profession.
Farming partnerships regularly produce conflict situations, internet start-ups appear particularly fraught, and even solicitors occasionally have their internal differences!
There are many recurring themes in such disputes. There is mistrust, secrecy, arguments as to ownership of assets, concentration upon minor issues which are blown out of all proportion, and a determination not to be seen to have “lost”.
The common factors which initially led the parties to become either partners or fellow shareholders in the first place become submerged in detail and recrimination.
At times such disputes may appear unreal. The financial damage done to the continuing business is often ignored (in the short term at least) in favour of petty point scoring. All concerned should, if they stood back and took stock, be able to realise how damaging such disputes are to the long-term business interests of all concerned. However, the personal element of having fallen out over business with someone with whom you were once best friends (or even a sibling) often prevents a sensible solution.
Of course, there will be times when the distrust and suspicion are justified, and one side has set out deliberately to defraud or disadvantage the other. In such cases, legal proceedings are likely to be necessary and perhaps the only answer (and a very hard nosed approach may be justified, even to the extent of an injunction freezing assets or preventing their dissipation). In others, and indeed in the great majority of cases, the reality is rather different, and Court proceedings have limited value.
There are certainly legal remedies available. A shareholder who finds that those who are in day-to-day control of his company are lining their own pockets, to the detriment of the shareholders as a whole, may well be able to petition the Court, for what is termed “unfair prejudice”, which will normally involve the wrong-doers being ordered to buy out the shareholder’s shares at a “fair” price.
Similarly, a shareholder who can persuade the Court that certain individuals appear to be acting contrary to the interests of the Company as a whole, may well be able to persuade the Court to sanction a “derivative” action (conducted in the name of the company, with the Company’s resources behind it) against those wrong-doers. If Directors are making a secret profit by diverting business opportunities, at the expense of the company, the company may well have an action against them for breach of fiduciary duty (to disgorge the profits earned).
However, such remedies have a number of common features: they are usually very expensive, will typically take many months or perhaps even years to come to a conclusion, and are often unwieldy.
The same comments apply in relation to partnership disputes. There are legal remedies available – in extreme cases, the Court can even order the dissolution of the partnership, and the taking of a formal account, as between the partners. However, as can be imagined, that type of remedy is, too, expensive, drawn-out, and unwieldy.
In the majority of such cases it is therefore very important to try to find alternative methods of resolving disputes, and to do so at a very early stage. Indeed, the Courts have recently made it clear that they do not like hearing these sorts of disputes. Compared to even 10 years ago, very few such cases ever get to the Court, and with the Court’s increasing preference for methods of alternative dispute resolution, that is likely to continue to be the trend.
Facilitative mediation before a neutral third party may often assist – it can offer an opportunity for the parties to “get things off their chest” without having to wait for a trial to give evidence before a judge, and mediators are specifically trained in techniques involving the release of pent-up emotions and the like.
Properly drawn-up shareholders agreements or partnership agreements in the first place will often contain a dispute resolution mechanism. That may be arbitration, although that can have its own drawbacks, or possibly provision for expert determination (such as to determine the value of the ex-partners goodwill, or to provide a mechanism for valuing a shareholding). Any of such methods is likely to be preferable to going to Court.
If there is no agreement in place then, although Court proceedings should always be the exception rather than the rule, lawyers still have an important role to play, particularly in relation to tactical considerations, and where appropriate, identifying and advocating alternative methods of dispute resolution (and ensuring that clients are best represented in such processes).
Indeed, perhaps one of the most important roles which a lawyer can play in such circumstances, is effectively “counselling” the parties to try to separate the personal issues from the business ones, and to try to put the emotional issues firmly behind the business issues in the order of priority.
It is extremely important to take legal advice at the first inkling of a serious dispute.
For more information in relation to the above article please contact Bob
Elliott, 2 Merchants Drive, Carlisle, CA3 0JW
T: 01228 552600 F: 01228 549560