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Shareholder Disputes/Corporate Divorce
Published March 2008 By Tom Esler
Like divorce, shareholder disputes are very common. Like divorce breaking up a company can be very messy and inevitably can fatally damage the company.
Disputes can arise because of disagreements over direction of company development, poor personal relationships and, inevitably, money amongst other reasons.
Even if you are a majority shareholder (75% or more) you could find yourself faced with a disgruntled minority shareholder and the prospect of very disruptive dispute.
As a disgruntled minority shareholder (49% or less) you could face significant difficulties in enforcing your legal rights as a shareholder.
Even as an equal shareholder (50%) a dispute could effectively result in shareholder deadlock.
Each of these situations can be disastrous for a company.
In order to avoid and/or reduce the impact of shareholder disputes companies and shareholders should do the following:-
a) Ensure that company articles of association are up to date and provide for disputes and deadlock situations;
b) If possible, ensure that the shareholders have a separate shareholder agreement. That agreement, which is effectively a contract between the shareholders should enshrine legitimate expectations of shareholders and importantly deal with various “leaver” situations and provide formula for the calculation of share valuations in such instances;
c) As soon as a dispute erupts take professional advice. In many shareholder disputes scenarios the substantive reason for the dispute can be quickly overtaken by personal recrimination and accusation resulting in entrenched shareholders and little room for a negotiation on the substantive issue.
Shareholder disputes are some of the most expensive classes of litigation coming before the courts. If possible negotiation, using the strict legal rights as a last resort is the best way to reach a solution in these cases. Obviously the earlier those negotiations take place the higher the prospect of reaching a solution.
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