Origins of shareholder disputes
Disputes by co-shareholders in a business or partners in a partnership or joint venture are common. Differences by shareholders, if not resolved on time, may degenerate into disputes. The reasons thereof are diverse but common ones include the following:
- Undocumented shareholding, profit sharing, corporate governance structures.
- If documented, differences in interpreting the agreements such as number of shares held.
- Badly structured shareholding or profit sharing structure, for example one based solely on capital injected.
- Value of dividends, frequency and timing thereof. Shareholders may have different financial requirements due to their lifestyles or other sources of income.
- Differences over board members.
- Extent of shareholders involvement on the board or management.
- For owner managed businesses perceived different non-monetary contributions to the business.
- How to raise additional funding for the business, for example rights issue or borrowings.
- Differences over the strategic direction of the company e.g. diversification.
- Different cultures e.g. in mergers.
Tips on how to resolve shareholder differences or disputes
Shareholders should take time to understand their role, those of the board and management and separate themselves from the business. Shareholders should choose board representatives carefully to protect their interests.
Openness where there are different opinions in encouraged. Where possible, especially for small companies or companies with a few shareholders, members should engage each other to brainstorm or resolve their differences. Influence on the company should be formal and through board representatives.
Problems may arise where owner-managers employ their relatives especially children after college or university. The children usually do not have the history of the company, may not appreciate or respect the mutual understanding or agreements, some not written, by or between the shareholders. Shareholder agreements should be reviewed and updated regularly.
Differences, which may be degenerate into disputes, should be resolved in terms of the valid shareholders agreements or Articles of Association, if provided for, through candid and constructive engagement. If one- on-one engagements fail, parties may engage a mediator they mutually respect. This can be a common friend, a legal practitioner, a retired judge, a chartered accountant, etc. If that fails, subject to the shareholders’ agreement or Articles of Association the shareholders may consider arbitration, which may be final or subject to appeal. They should agree on the arbitrator.
Section 41 of the new Companies and Other Entities Act (Chapter 24:31) provides for shareholding investigation by the Registrar of Companies, at the request of a shareholder. Further, section 233 of the same Act provides for what are called appraisal rights which can be exercised by dissenting shareholders. A disgruntled shareholder may offer to be bought out by the other shareholders. Civil litigation may be the last option but may stretch over several years. It is confrontational.
Some shareholders may frustrate others who are directors or employees to resign. Where they are employees disciplinary hearings can be stage- managed to force them out. Shareholder infighting, if not contained, can militate against the company through polarisation, insecurity or resignation by board members or key members of management.
This articles is for general information only, is not specific to any organisation and does not constitute full professional advice.
Godknows Hofisi is a legal practitioner, chartered accountant and corporate rescue practitioner. He is also a consultant in deal structuring and tax. He writes in his personal capacity and can be contacted on +263 772 246 900 or gohofisi@gmail.com
