ARTICLE
19 March 2024

Shareholder Disputes. Understanding The Primary Instigator & Preclude

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AGPLAW | A.G. Paphitis & Co. LLC

Contributor

Established in 2006, AGP & Co is a highly reputable, dynamic, award winning and excellence driven Law Firm based in Cyprus with a strong international presence. It provides full service Legal, Corporate, FS Advisory & Regulatory Compliance/AML, Tax, Immigration and Real Estate services.
What are the main reasons for the rise of shareholder disputes and what are the mechanisms available for shareholder dispute resolution?
Cyprus Corporate/Commercial Law
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What are the main reasons for the rise of shareholder disputes and what are the mechanisms available for shareholder dispute resolution?

Conflicts and disagreements are an inherent aspect of any business corporation. Navigating such conflicts and disagreements is an inevitable challenge encountered by companies of all kinds and sizes.

Within the field of shareholder dynamics, matters relating to corporate management, profit allocation, authority, and conflicting personal interests frequently fuel tensions. Such discord has the potential to compromise the rights of minority shareholders and pose significant risks to the company's operational integrity and overarching objectives. Additionally, the limited influence of minority shareholders in the decision-making process can exacerbate tensions, prompting recourse to legal avenues for protection.

Understanding the primary instigator of shareholder disputes is essential in proactively addressing them:

  • In Cyprus, a breach of shareholder agreements is identified as the primary cause of Shareholder disputes. Such agreements serve to govern the venture, rights, and responsibilities of shareholders regarding the company. By delineating aspects such as voting rights, conditions for share sales, decision-making thresholds, and operational parameters for the board of directors, shareholder agreements establish clear guidelines for company operations. Consequently, any failure by shareholders to fulfill their prescribed duties or obligations outlined in such agreements constitutes a breach often resulting in disputes among shareholders.
  • Overseeing and directing the company's operation often leads to increased shareholder disputes, particularly when multiple individuals are involved in management and control. company opinions on what constitutes the right course of action in specific situations or which factors should be considered when making decisions about the company's affairs contribute to this conflict. Therefore, disagreements frequently occur among shareholders who hold diverse viewpoints and ideas.
  • It is crucial for shareholders to fulfill and adhere to their fiduciary duties. Failure to carry out these duties, which may impact on other shareholders and put them at a disadvantage compared to others, is likely to lead to shareholder conflicts.
  • Minority shareholders have minimal impact on decision-making due to their limited influence within the company. As a result, they often express concerns about the perceived oppression of certain shareholders in managing companies' affairs. Cyprus legislation grants minority shareholders the right to seek legal recourse and protection through the legal proceedings in Cyprus Courts.

To preclude disputes, proactive measures are necessary to be taken.

First and foremost, it is imperative to draft clear and precise company documents during the negotiation phase, delineating decision-making authority and constraints. This task becomes markedly more demanding once a dispute emerges. In such instances, shareholders must carefully inspect the company's constitutional documents, such as the Articles of Association (AOA) or independent shareholder agreements. For instance, in the event of a dispute over a specific breach of duty, the companies AOA may stipulate provisions mandating shareholders to divest their shares at a predetermined valuation under certain circumstances. This leaves minimal chance for contention regarding the divestment of shares by the breaching shareholder.

Convening an extraordinary general meeting (EGM) holds equal significance, alongside a comprehensive review of the company's AOA and shareholder agreements. Shareholders retain the prerogative to petition for an EGM as per section 126 of the Cyprus Companies Law Cap 113. This forum provides a platform to address emerging disputes through discussion.

Negotiation serves as a pivotal strategy to preempt the escalation of intricate and high-value shareholder disputes. Well- informed and resolute shareholders can negotiate more favorable outcomes, thus avoiding protracted and costly legal proceedings. Alternatively, mediation and Alternative Dispute Resolution (ADR) mechanisms offer impartial facilitation, fostering consensus and yielding enforceable agreements.

By prioritizing proactive measures and leveraging effective dispute resolution mechanisms, shareholders can mitigate conflicts and protect the interests of the company.

At AGPLAW, we understand the complexities of shareholder disputes and offer tailored legal advice and support. From proactive negotiation strategies to mediation services and courtroom representation, our team assists clients in navigating disputes effectively and safeguarding their business interests. With our expertise, shareholders can address conflicts promptly and preserve the integrity of their companies.

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.

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