Shareholder fall-outs are a fact of business life.
Not unlike marriage, private shareholders, joint venture partners and other investors all set out in business with the best of intentions ‘ the goal of a happy fulfilled family life is swapped for aims of business development, expansion, profits and returns.
There are day-to-day pressures – cashflow, recruitment, regulation, finance to name but a few ‘ but shareholders are usually able to overcome challenges through a common eye to profit and growth. Catastrophic fallout ‘ ‘corporate divorce’ ‘ is relatively unusual, however add in the further pressures caused by a global pandemic and the ‘glue’ that usually bonds shareholders can weaken. It is perhaps this effect that has caused the recent stark increase in the number of shareholder disputes.
Disagreement as to strategic direction in these circumstances, can be so fundamental as to cause existential differences between shareholders ‘ should we invest through the crisis ‘ or batten down, should we alter the business model ‘ or delivery channels ‘ or hope to ‘sit-out’ the crisis, do we lay off staff ‘ or retain them to be ready to go, post-crisis, do we take bounce-back finance ‘ or ignore, do we distribute profits ‘ or reinvest through the crisis. These have been the conversations taking place in boardrooms throughout the UK (and beyond).
For shareholders however, there may also be generational differences to add into the mix, and a different position in the timeline of life can radically alter a party’s expectations. A shareholder with a 15-20 year career span ahead of them might want to invest through crisis to fuel future growth, whilst a shareholder in their later years might be more focussed on cash and asset position to fund exit. Shareholders with an eye on sale may want to focus on attractive EBITDA, whilst those with an eye to the future may be focussed on investment in new talent.
Where disagreement exists at such a fundamental level it is not uncommon (and becoming increasingly common) for shareholder fall-out to occur ‘ which can quickly escalate ‘ often to shareholder dispute and even litigation. Not only costly in terms of legal fees, but also in terms of the distraction of management attention away from the business itself.
But disputes can be avoided with good communication; members should ensure they understand what each shareholder seeks from the business, what his or her exit strategy is, whether they have an eye to a big payday ‘ or are content simply to earn a living – are they motivated by reward, or by legacy, or perhaps by some other more subtle success measure. By understanding each other’s drivers ‘ and most importantly regularly discussing them ‘ different aims can be understood and accommodated and needn’t become fractures ‘ or even friction. Business strategy can be built around the members ‘ an aim to be cash rich at pre-determined points to aid exit, the grooming of management teams and key employees to step in as successors, the development of relationships with financiers and investors to fund exit or growth.
Here a well-drafted Shareholders Agreement can pay dividends (quite literally!) ‘ exit and valuation mechanisms can be incorporated, put and call options, share option schemes, provision for divisible/distributable assets, agreement for sale triggers, etc, etc. Once drafted the Shareholders Agreement should be a ‘living’ document, regularly reviewed and amended in line with business and life strategy. A well drafted Shareholders Agreement can pre-empt problems and provide solutions – or alternatively, incorporate business-friendly resolution processes which aid resolution and keep the parties out of court.
When things do go wrong, perhaps more than any other area of law, it’s crucial to get specialist advice from a shareholder disputes lawyer. Many ‘jobbing’ lawyers will hold themselves out as capable of dealing with shareholder litigation, but it’s an area that really does need a specialist care. There are so many moving parts in a shareholder claim, the Articles, Shareholders Agreements, valuation mechanisms, finance and funding, the regulatory and tax regimes. Competent practitioners will have a detailed grasp of the facets of such disputes and most importantly an understanding of how it will likely play out ‘ often bypassing the courts and using tools such as mediation and independent valuation,n to resolve maters quickly and tax-efficiently.
But the key message is one of communication, returning to the marriage analogy ‘ a couple who communicate well, rarely fall out.