Before shareholder conflicts arise, it can be beneficial to follow certain guidelines in order to ensure that conflicts do not arise at all, can be mitigated, or that a stronger position can be achieved. The following is a non-exhaustive list of 10 tips for unlisted companies to avoid conflict.
) Tip 1: Comprehensive and clear articles of association and shareholder agreement
Many conflicts can be prevented by having articles of
association (hereinafter AoAs), and potentially in addition, a
shareholder agreement (hereinafter SHA) in place for the company in
question. These address issues such as a deadlock situation, the
possibility or obligation to transfer shares under certain
circumstances, and information obligations. Both are the principal
documents in which shareholder rights and obligations are
regulated. It is, however, imperative to tailor-make such
documents. While certain clauses can be useful for certain types of
shareholdings and companies, they may be extremely
counter-productive in other situations. It is best to discuss this
with a legal advisor.
) Tip 2: Clear rules on financial distributions
The origin of many conflicts are disagreements on whether or how
finances should be distributed. This does not only concern dividend
distributions, but can also include management fees or salaries. A
simple scenario is where dividends cannot be paid out, sometimes
for several years, and a shareholder believes that dividend
distributions are not possible due to exorbitant management fees
and salaries. It is thus important to have clear policies and rules
in place on such matters.
) Tip 3: Clear rules on transferability of shares
Conflicts may arise either because no rules have been foreseen
for the transfer of shares, or a party sells its shares to a third
party with whom the other shareholders have difficulties to
cooperate. Conflicts can, however, also arise if parties feel
trapped in the company with no possibility to leave. Rules should
be tailor-made in order to match the expectations and
practicalities of the shareholders.
) Tip 4: Clear rules on inputs and outputs
Shareholders also frequently come into conflict with each other
because the existing relationships have not been well defined with
regards to the required inputs and outputs by each party. A
consequence of this can be that certain shareholders invest a lot
of time and energy to make the company a success, whilst others
invest nothing or close to nothing, but profit heavily from the
growing success of the company enabled by the other shareholders.
Solutions can be foreseen in the AoAs or SHA, including that
shareholders who do not participate in investing in the success of
the company, have to exit the company by selling their shares to
the other shareholders.
) Tip 5: Keep detailed records
There are several reasons to keep detailed records of shareholder decisions, communications and so on. Firstly, it clarifies and records agreements. Despite the legal requirements to do so, it frequently happens that decisions and agreements are not properly documented. After some time, parties remember differently what was decided or agreed upon, and without proper records it is difficult to prove a specific decision or agreement. Secondly, detailed administration is also crucial as general evidence to strengthen a shareholder´s position in a conflict. Particularly, should decisions be taken by the shareholders and company, or acts be carried out by the company with which a shareholder does not agree and which may put the company at risk, it may be prudent and key for such a shareholder to ensure that it has written evidence of the disagreement, possibly even demonstrating the reasons it has explained to the company and its co-shareholders.
) Tip 6: Follow good corporate housekeeping rules
Connected to the keeping of detailed documentation, also in
general, parties should ensure that corporate house-keeping rules
are followed, such as the correct persons signing the shareholder
minutes, powers of attorney, and if management is involved, that
the correct managers sign contractual documents. This too entails
storing the documents in an orderly manner.
) Tip 7: Clear and early communication
With regards to detailed records, it is key to have clear communication between shareholders (and management), so that misunderstandings will not lead to conflicts. Equally important, once a conflict arises, it is key to communicate early in order to seek a solution while it is still a minor disagreement. This provides a simpler and less costly resolution, compared to a full-scale shareholder conflict.
) Tip 8: Act in the interest of the company
Once a party is a shareholder or manager of the company, it is crucial to realise that this party must act in the corporate interest of the company. It must not act solely in its own personal interest, violating the interest of the company and its co-shareholders. As the concept of the corporate interest of the company is not clear, and in case of important transactions, where there is a risk that other parties may challenge whether such transactions were in the best interest of the company, it may be prudent to obtain external advice to support that the transaction is in the corporate interest of the enterprise.
) Tip 9: Have insolvency law provisions in mind
Conflicts often start once the company experiences financial
difficulty, or the conflict between the shareholders may also push
the business towards financial problems. For this reason, it is not
only paramount to keep abreast of the applicable corporate laws,
but also take into account insolvency rules. There are strict
regulations on the transfer of assets and payment of debts in
pre-insolvency situations. Shareholders that had a big influence on
the management of the company may be qualified as de-facto
directors and be liable on such grounds.
) Tip 10: Contact legal advisor
Considering the potential costs in monetary terms, but also in terms of energy invested, it is advisable to seek legal advice as early as possible. Whilst advice of an experienced lawyer usually does not come for free, it will likely be much less costly than the damage created by an escalating shareholder conflict.
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.