In companies big and small, one of the most common problems that arises from time to time is a dispute involving shareholders. In many cases, these disputes happen for various reasons, such as a fallout over the company’s management and direction, personal problems that may affect critical business relationships, conflicts of interests within the company, allegations of fraudulent or criminal activity pertaining to company management, and many other scenarios.
When these or other situations develop, disputes can quickly escalate, often to the point of requiring legal intervention. If you are in need of additional information about possible solutions to these situations, here are 7 common legal resolutions often used to settle disputes involving shareholders.
1. Shareholders Meeting
Pursuant to the Company Act of 2006, if shareholders who hold at least a 5% voting share make the request, the company is legally obligated to call a general meeting of all shareholders. The written request must clearly state not only the issues to be discussed, but also any resolutions shareholders may pass at the meeting. Once the request is properly made, the board is legally required to schedule a meeting to take place no later than 28 days from the date of the request.
2. Appointment of Non-Executive Director
In some cases, a company will choose to appoint a non-executive director as a way to resolve shareholder disputes. This is often done with companies that have a limited number of shareholders, often fewer than 100. When this is done, mediation is often used, since this will allow for greater in-depth discussion between the disputing parties on the issues to be resolved.
3. Removing a Director
In extreme situations, especially where illegal activity is alleged to have occurred, a common legal resolution to shareholder disputes is to remove the company’s director from the board. But to do so, it takes a vote of more than 50% of the shareholders in attendance at a shareholder’s meeting. This removal power, allowed for by the Company Act of 2006, does give the director being removed the right to appeal the decision.
While removing the director may sound like the best solution to the problem, it can sometimes create even more problems, especially if the director also happens to be a shareholder or perhaps a company employee. If this does eventually become the chosen course of action, it is legally required minutes be taken at the shareholder meeting, and that the minutes be kept at the company headquarters for review by any interested parties.
4. Negotiations
In certain situations where an impasse occurs and there appears to be no light at the end of the tunnel, a court may choose to appoint negotiators who specialize in high-level corporate matters to help end the crisis. In many cases, the negotiator may in fact be a former CEO of a corporation, or perhaps a high-profile attorney who specializes in corporate negotiations. In any case, all parties involved in the negotiations will be allowed to have their own attorneys present during the meetings, and can also have significant input into any final agreements that may be reached.
5. Employment Cause of Action
If a shareholder also happens to be an employee of the company, an employment cause of action may be brought by a party who is disputing their dismissal from the company. These disputes can be related to a variety of issues, including discrimination, unfair dismissal, pay inequality, retaliation for whistleblowing, or other similar issues. When this is the case, one common legal resolution to the matter is to terminate the shareholder’s employment with the company under what is known as an employee settlement agreement.
If a company does indeed terminate the shareholder’s employment with the company and buys some or all of their shares, the shareholder is then entitled to a lump-sum payment of $50,000 tax-free. While this type of settlement often requires intense negotiations, it is usually credited with being able to solve a multitude of problems.
6. Valuation
When a dispute’s solution involves buying out a shareholder, one of the most important aspects of this process involves the use of a valuation consultant. This individual, appointed by a court, will be responsible for evaluating various criteria to determine not only the company’s value, but also how much compensation the shareholder should receive for their shares of stock, loss of employment, and other damages they may have incurred as a result of the dispute. But along with the valuation consultant, negotiations such as these also involve accountants working for both sides, attorneys, and other consultants experienced in corporate matters.
7. Selling the Company
If after various types of negotiations fail to bring the shareholder dispute to a resolution that is amicable for everyone, a court may eventually order the company itself be sold to another party. If this is done, all parties will thus be allowed to make a clean break from the company, with each receiving compensation that is deemed by the court to be adequate based on the company’s value, value of any shares held by the individuals, and other compensation for punitive damages or other aspects that may justify additional compensation.
This is more often done with smaller companies, since it is generally much easier to dissolve these companies and sell them to new buyers than it is to attempt this with larger corporations. In addition to this, any attempt to sell a company also requires a meeting of all shareholders, where they can be given details of the sale and be given an opportunity to ask questions to those who will be conducting the sale.
Takeaway:
Since shareholders can be part of companies big and small, a variety of resolutions are often needed to resolve these matters to the satisfaction of everyone. Whether a shareholder dispute will lead to a company being sold, compensation being paid for issues related to employment matters, or perhaps a court ordering the appointment of a non-executive director, these and anything that suits shareholders can often be just what is needed to solve these disputes.