Are you a minority shareholder in a company? If so, there's a chance you may eventually find yourself in a dispute with the majority shareholder(s) who has more control. But if you understand your options you can potentially resolve – and even avoid—disputes. Here are four important tips to keep in mind.
1. Head 'em off
Minority shareholders have two kinds of legal protection: securities legislation and shareholder agreements. The latter can include additional rights that extend beyond what's included in legislation. A shareholder agreement doesn't just fall into your lap. You must independently pursue one. In these agreements, the majority shareholder usually gives up rights to the minority. The agreement also provides guidance as to how shareholders conduct themselves and behave in certain situations. So, many potential issues can be addressed ahead of time in a shareholder agreement, saving you from future dispute.
2. When breakups go bad
Shareholder disputes don't necessarily evolve because people don't get along. Most dispute cases arise when one party wants to retire or just get their money out. Their motivation may be a timing issue or disagreement with the direction the company is taking.
In cases where people don't get along, I've heard judges say, "You guys aren't getting along, so I'm splitting you up no matter what." In this case they'll usually have the majority buy out the minority.
But, public courts usually aren't the best way to resolve shareholder disputes. The proceedings are in the public domain and the process is extremely slow. If you're in the private sector, there are effective alternatives: mediation and arbitration.
3. Call the referee
Mediation brings all parties in a dispute together in a room, usually with the help of a mediator. The mediator hears the evidence and makes a recommendation to resolve the issue, but it's not binding. Essentially they're saying, "If I was the judge in this case, this is what I would tell you."
Arbitration takes places in a private court where the parties have signed a legally binding contract agreeing that the decision of the arbitrator will be binding. This option is quicker, faster, and allows you more privacy. But in my experience, mediation is preferable because in the end, you still have a choice.
4. Don't go it alone
How do you arm yourself when walking into a dispute situation? Get a Chartered Business Valuator (CBV) on your side, so you know how much your business is worth or how much money has been lost. Sometimes shareholders can't agree on the value of a share – in those cases we do research and share our expert analysis of what they are actually worth. The goal of your valuation expert should always be to reach fair, even-handed conclusions. Use these conclusions and the other tips we've discussed to dramatically improve your chances of a fair resolution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
