Why shareholder disputes are a problem for your business and how you can set yourself up to resolve them
Building a successful start-up is challenging – securing funding, recruiting the right people, understanding customers, fending off the competition – and, whilst concentrating on these challenges, often the internal structure of your business is neglected.
A shareholders’ agreement is the key mechanism and safeguard for preventing or at least minimising the risk, and ensuring smooth navigation of shareholder disputes. It is your protection should things go wrong and should be created at the start of your company’s life rather than waiting until it’s too late. It will clearly set out your rights as a shareholder, and the obligations of your fellow shareholders and the procedures for dealing with disagreements as they arise.
Often, once the pressure, stress, and struggles to succeed start to take hold, or when a business really starts to scale up, the shared vision of the business partners or shareholders can start to turn sour and it is then, the prospect of a shareholder dispute may rear its head.
Typically, disputes between shareholders arise when there is disagreement as to the company’s strategy, or when an investor wishes to sell their shares or considers that their interests are being unfairly prejudiced. Lack of growth or poor performance may increase shareholder frustration and sometimes, shareholders simply fall out with each other.
Whilst many people may say disputes are inevitable, they can be prevented or at least resolved before things get out of control.
The impact shareholder disputes could have on your business
Shareholder disputes can have a big impact on any business especially a start-up.
If left lingering, any dispute can distract from the day to day running of the business, be stressful for employees and have damaging long-term consequences. In serious cases, control of the company can be taken away from directors and they may even face a winding up order.
High costs
Generally speaking, the greater the duration of any dispute, the more expensive and disruptive it is likely to be. Any dispute that leads to litigation can get very costly not only in legal fees but lost time and potential sales too, which can quickly impact on future revenue and growth. Start-ups can ill afford to be paying out vital funds on legal fees, which could otherwise be invested into the company.
Impact on future investment and reputation
Shareholder actions will not only impact the current business but can also deter potential long-term investment and make future M&A activity difficult.
Long and drawn-out shareholder disputes can also make a company, or its management or directors look incompetent or difficult to do business with.
All this needs to be considered when deciding whether, when and how to settle a dispute.
How to resolve shareholder disputes – be proactive and act early
If managed early and decisive steps taken, shareholder disputes can be resolved with minimal impact on the business.
The chosen strategy you take will obviously depend upon the nature of the dispute in question.
Firstly, you need to understand what exactly the shareholders want. Are they just wanting to be heard? Do they believe there is genuine wrongdoing? Are they prepared to take further action?
You should then consider whether the business relationship can be saved or whether it is in the company’s best interests to save it. If so, resolution can usually be achieved through discussion, negotiation, and compromise. If not, the parties will generally need to look for a means of exit for one, or both.
It is prudent to seek advice in the early stages of a decision like this and assess your options.
We can help you assess the strength of your position and ensure you have complied with all relevant contractual and statutory obligations before helping you decide on the best course of action and then help you deliver that.
We can advise you on the right strategy to use in any dispute, to best protect your interests and resolve matters quickly and effectively with the least impact possible on the business.
Please contact Ignition Law for more information.
