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Shareholder disputes and their risks

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Shareholder disputes and their risks–The most unnecessary way to ruin your business.
Financially, shareholders are connected even more closely than spouses. In the event of a dispute, this can have serious consequences.

1. What does this mean?

The following are common shareholder scenarios:

Case 1 : Several shareholders have equal rights and shares in a company, and possibly also participate in the company management. They all get along with one another and agree that all
(at least all important decisions are to be made together.

Case 2: The shareholding consists of one or more majority shareholders and a ‘strenger’ minority share-holder, who is often the company’ s financier. This ‘strenger’ minority shareholder allows the majority shareholders to largely have free reign, but retains a right of veto (at least for important decisions).

Case 3: The shareholding consists of one or more majority shareholders and a ‘weaker’ minority share-holder. However, they all get along with one another and agree that all (at least all important decisions are to be made together. And then a dispute arises … This will often happen only after years have passed, and possibly only after the second or third generations have joined the business, resulting in the company having numereus shareholders. In Case 1, the shareholders / groups of shareholders block each other. Similarly, in Case 2, the attempt to force the ‘strenger’ minority shareholder out of the company fails because of that shareholder’ s right of veto. In Case 3, the minority shareholder is effectively subject to exprepriation by the majority.

The shareholders bombard each other with injunctions and legal actions. Usually, the dispute does not remain unnoticed by the outside world – if the blockade itself does not lead to insolvency, once the banks start terminating loan contracts and current accounts, the business will be in serious financial difficulty. In the end, the business is ruined.

2. What can you do?

In terms of preventative measures, it must be made clear that disputes cannot be avoided per se. There are, however, many possible measures that can be taken to reduce the risks associated with disputes (particularly, those which may threaten the business’ very existence) and to avoid the situation, where the carrying on of business by the company is blocked due to shareholder actions resulting from a dispute.

lt is almost a platitude to say that care should be taken in the selection of one’s fellow shareholders -this is of no assistance when once close business partners (or even spouses or life partners) later quarre!.

Genuine preventative measures are possible through careful succession planning. In addition, the shareholders’ agreement can be drafted to contain considered and specific previsions tailored to the circumstances of the individual situation, with the purpose of avoiding or at least minimizing the risk that in event of a dispute, shareholders may block one another, or minority shareholders may effectively be exprepriated.

In particular cases, the setting-up of alternative conflict resolution mechanisms, such as arbitration or mediation can make sense. In the event that it should come to a dispute, your best interests should be enforced with all available means, but as far as possible without endangering the very existence of the company. Alternatively, or in parallel to having recourse to the courts, it is in most cases sensible to reach (as quickly as possibel an out-of-court settlement to the dispute.

3. How can we help you?

We have long-term experience in previding advice to small and medium-sized enterprises (Mittelstand) and / or their shareholders regarding the structure and terms of their shareholder agreements, with particular consideration of possible shareholder disputes.

We also have significant experience in the resolution of shareholder disputes, through the court system, through alternative dispute resolution means, and through simple negotiation. Please contact us if you have any questions. We would be very pleased to be

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