Shareholder and partnership disputes are on the rise

..And, so is mediation of them. In this article, Rebecca Attree of IPOS Mediation explains why.

Shareholder and partnership disputes have always been prevalent, and now I am experiencing that they are increasing. A combination of the “post pandemic fall out” and the struggling economy mean shareholders and partners of ailing businesses are finding it hard to stay aligned. Mediation is a particularly good way to resolve these conflicts because it is flexible, leaves the parties in charge of the outcome, cost effective and importantly quick to set up. When the chips are down between owners it can be very hard to continue to run a business profitably and there is no time or money to waste by engaging in lengthy litigation. Time to seize the day and make resolving the issues a priority.

Why is mediation particularly suitable for these types of disputes?

The range of outcomes at a mediation are very wide – I outline some of them below. If these types of claims go to court a judge has a very wide discretion as to the judgment they may make. This means uncertainty and litigation risk. The solution parties often think they want – for one to buy out the other – is one a court will only grant in rare circumstances. So by taking the matter into their own hands by mediation parties remain in control of the outcome.

What types of issue cause the conflict?

Majority shareholder issues

The majority shareholder may say they are being blocked by a small minority from pursuing a course of action. I have had cases where following the pandemic stakeholders have reassessed their values/ goals/ drivers and found they are no longer aligned. For example, during the pandemic there was a poignant case of two practising doctors who also had a separate business together that they ran part time. One felt called to return to work for the NHS full time. The other, with underlying health issues, had no wish to return to the hospital wards and wanted to run the business full time from home.

Minority shareholder issues

Or the minority shareholders may complain they are not being kept informed or not receiving dividends. It’s surprising how many family businesses are run through a corporate structure with certain family members being considered “sleeping shareholders” and somehow, they are overlooked when dividends are distributed. I had a case where three siblings woke up to this and brought a massive claim for retrospective dividends, to the alarm of the one sibling who had been putting in all the hard graft and paying dividends just to themselves for years. Sometimes the legal rights do not align with people’s sense of entitlement.

Fraud/ breach of director’s duties

Then there are the cases where there are allegations of fraud or breach of duties by a shareholder – director. Trust has broken down, and usually the business has practically ground to a halt or at best is limping along. To take this to court would involve expensive investigation and reports and often the one making the allegations has only very limited ready access to records. Not an insurmountable burden, but is it worth embarking on this road?

So, what to do?

At a mediation of this type of dispute it is best to come with an open mind as often there are many possible solutions to the problem. I set out below some of the more common ones I have encountered.

Can you continue in business with some adjustments?

A mediator will usually explore early on whether there is any prospect of the business continuing and the shareholders/ partners remaining, perhaps in an altered state of relationship. Can the parties agree to operate albeit with changed responsibilities/ a fresh set of goals and objectives? Would bringing in a third party to the management make a difference? Can the parties “agree to disagree” on certain aspects that are not fundamental to the key objectives of the business? Sometimes this discussion takes seconds with each party saying a firm “no” to the proposition, in which case alternative options are explored. Other times a detailed exploration may reveal parties are more aligned than they thought, just they hadn’t taken the time or communicated effectively enough to find out.

One shareholder buys out the other

The classic solution is for one party to buy out the other. Frequently during this discussion, the party who begins by saying they will buy the other out later becomes the one contemplating a sale as the tables are turned when the price of shares is discussed. (“If you are willing to sell your shares for £X, why not buy my shares for £X?” is how the negotiation may go.) This can require mental gymnastics for parties who are already stretched about making a good decision on the day, but the possibility can be explored and analysed calmly in private with the mediator. A good tip for a solicitor accompanying a client to this type of mediation is to bring an excel spreadsheet so that sums allocated for certain aspects can be adjusted according to values attributed on the day.

Partition

Sometimes parties prefer to divide the business rather than it being “all or nothing”. A good idea in principle, but one that can be hard to achieve as a fully binding settlement agreement in one mediation session. This is because there may be complex issues of who will take which clients/ contracts/ connections. Often these depend upon the third party agreeing to go with one party or the other. Equally employees will need to be consulted and their agreement obtained before any change takes place. That is not to say it cannot be achieved. Mediations with this type of outcome typically reach a “heads of agreement” during the session with some work being done in the days soon after to wrap up the detail in a settlement agreement with various appendices.

Winding up/ voluntary liquidation

Where the purpose of the company is no longer being met it can be worth considering voluntarily winding it up. Sometimes this is threatened by one party as an outcome if alternatives are not agreed to. A divorcing couple who was also in business together I recently mediated decided this was the best way forward. Such was the extent of the deadlock and intensity of emotion that neither wanted to the other to have the business if they couldn’t keep it for themselves. If there are issues of potential insolvency there may be a threat from one party to put the company into voluntary liquidation. A mediator’s role is to take the heat out of these suggestions and to look with each party as to whether it could be in their interests to do this. Financial and emotional issues need to be addressed, as well as the likely consequences of this action.

Reputation

Usually in these types of cases employees and clients/ customers have already got some idea that there is “trouble afoot”. Managing how the outcome of the mediation will be communicated to these third parties is a key part of the solution and needs to be discussed and agreed upon. It pays to think about this beforehand and take communications advice if need be.

Preparation

Shareholder/ partnership mediations particularly benefit from excellent preparation. The more the parties can get their heads around the various possible outcomes and how they would feel about them, the better. I like to make good use of the preparation time in a pre-mediation Zoom with each party and their adviser to get their imaginations seized of the possibilities they may be presented with on the day. As I said earlier, an open mind is key, but awareness of how the negotiations may take their course is also important. “To fail to prepare is to prepare to fail”.

Is it too early to mediate?

Rarely. If parties wait and try to continue to run the business when there is a dispute rumbling, it is more likely the business will flounder and there will be even less, or possibly nothing of value to argue about. Yes, it may be that decisions will need to be made on imperfect information but then it’s worth considering: “do you want just a mediation or a just mediation?” In my experience, most people want the former and fi nd the morning after a conflict has been put to bed much brighter.