A boardroom dispute can be extremely disruptive and demotivating and, if not addressed quickly, can destroy the value of a company with the result that no one gets anything out at the end.
When a dispute arises, the questions in the minds of many shareholders are these: What are my rights; what are my obligations and, therefore, what are my options?
For the purposes of this article we refer to the simplest of such organisations because the problems can be illustrated more clearly. This would be an organisation set up by two people owning 60% and 40%, respectively, of the shares of the business and who also work full time in the business. There are many such organisations being set up in the current economic climate e.g. as a manifestation of a previous working relationship by two employees made redundant from the same company at more or less at the same time. The principles which apply to these two-person companies apply similarly where companies are owned by three or more shareholders.
It is important to understand that each of these individuals may have several different relationships with the company. At the very least each is likely to be a director as well as being an employee and a shareholder of the business. Many business owners give little or no thought to the difference in these three relationships but the important point to remember is that if any one of them comes to an end it does not automatically bring to an end the other relationships. This can give rise to difficulties.
The situation can be even more complicated if either of the individuals has also loaned money to the business; in addition, there can be “hidden” obligations or liabilities of either party to the business if either has signed personal guarantees in respect of leases or finance agreements or other company obligations.
In order to understand how the relationship is governed, it will always be necessary to look at the company’s Articles of Association and to ascertain whether the parties have entered into a shareholder’s agreement. In some situations, there may be agreed provisions as to how to address the situation. It will also be necessary to look at any Directors Service Agreements, though many such companies do not have these.
Typically, the fall out will begin with a difference of views about the way that the company should be run or the direction that it should be moving. Every effort should be made to try and resolve these issues by negotiation. If this cannot be done by the individuals themselves, then, if both parties are still keen to remain in the business, it can be useful to engage the services of a trusted business adviser or even a mediator to try and assist communication between the parties with a view to achieving an agreed outcome by further negotiation.
However, if matters have irretrievably broken down both parties will have to address the practical aspects of resolving the dispute another way. In some cases it might be acceptable that the parties will look for a purchaser for the business. However, this can take a significant amount of time if the value of the business is not to be compromised and is certainly not a quick solution.
The more obvious outcome is that the majority shareholder will buy out the shares of the other, but there are many subsidiary issues to address. Over the next three months we will explore the options and tactics from the perspective of the majority shareholder and then from the perspective of the minority shareholder and then look at why it can be useful to have a shareholders agreement.