Shareholder disputes and how to prevent them

Shareholder disputes can be complex and challenging, with the potential to disrupt business operations and erode shareholder value. Businesses have encountered several economic challenges in recent years, including Covid-19, market instability, and rising interest rates. As a result, there has been an increase in shareholder disagreements and disputes.

Shareholder disputes can significantly impact a company. Internally, they can affect operational performance, and externally, they can impact reputation. Both of which can lead to a decline in financial performance.

Shareholder disputes can arise for various reasons, including:

• Breaches of the shareholders’ agreement or articles of association: a shareholder failing to abide by agreed terms or taking actions without the required consent of the majority of shareholders.
• Differing operational views: shareholders having differing views on company governance and operations, such as one wanting business expansion while another prioritises profitability.
• Fraudulent activity: a shareholder engaging in fraudulent actions, such as embezzlement or misappropriation of funds.
• Profit distributions: disagreements about the distribution of profits to shareholders.
• Exit strategies: disagreements about exit strategies when one or more shareholders want to exit the business

Preventing shareholder disputes

Whilst it is not possible to completely mitigate against the risk of a shareholder dispute arising, there are various actions that can be taken to reduce their likelihood:

• Clear shareholders’ agreement: a detailed and comprehensive shareholders’ agreement, drafted with the assistance of experienced lawyers and accountants, serves as an effective deterrent to potential disputes. Many shareholder agreements contain poorly drafted accounting terms that are difficult to interpret and do not reference accounting standards.
• Succession planning: establishing an appropriate succession plan and defining the process that is going to be undertaken if someone were to leave the business. This is particularly pertinent in businesses where it is known that one of the shareholders is likely to exit soon.
• Clear governance structure: establishing a clear governance and management structure with defined roles and responsibilities for shareholders and management. Clarity concerning the authority to make decisions will help prevent conflict.
• Dispute resolution mechanisms: including provisions in the shareholders’ agreement for resolving shareholder disputes, whether that be through the court or an alternative dispute resolution method, such as arbitration, mediation, or expert determination.

How we can help

Our Forensic Accounting team has significant experience working in the context of shareholder disputes. Areas where we can assist include:

• Valuations: we can provide unbiased opinions on value. Our team has performed business and asset valuations across a variety of sectors, in both contentious and non-contentious settings.
• Investigations: in instances where a shareholder is suspected of engaging in fraudulent activities, we have experience in investigating how funds were potentially misappropriated.
• Loss assessments: in instances where one party is claiming damages due to the actions of another shareholder, we can quantify the losses suffered.
• Reviewing legal agreements: we have significant experience in reviewing legal documents to ensure that the accounting and financial elements of those documents are articulated accurately.
• Litigation support: our team has experience working as party-appointed expert witness, expert determiner and providing mediation support.

For further information on the team and our experience, contact Matthew Ball, mball@geraldedelman.com.