Shareholders come in a variety of forms, ranging from Municipal Pension Funds with millions of shares in a listed company, to a regular individual with stocks in his/her family’s private company. Regardless of the number of stocks owned,both the Pension Fund and the average person have the potential to become embroiled in a shareholder dispute with the owners of the company and/or other shareholders.
What is a Shareholder Dispute?
Essentially, a shareholder dispute occurs when there is a disagreement between the shareholders regarding the governance and/or the running of the company’s operations and finances etc. Since all shareholders have some financial stake in the company, the disputes are generally more heated than usual, and the issues more complicated which then require in-depth engagement.
Some common sources of shareholder disputes are:
Other examples of less common reasons for shareholder disputes include minority shareholders feeling disadvantaged and a difference in compensation and/or contribution between shareholders.
Preparing for a Shareholder Dispute. Whilst it is not always apparent that a shareholder dispute may be on the horizon, companies can effectively plan for this scenario through effective utilization of the company’s Shareholder Agreement.
At the drafting stage of the Agreement, clauses for effective dispute resolution methods, such as mediation and arbitration, may be added to the Agreement. Further iron-clad clauses which govern capital contributions, majority and minority shareholder perspectives and the disposal of shares should also be drawn up in order to either avoid or alleviate contentious shareholder issues.
Remedying a Shareholder Dispute
Should a shareholder dispute arise within a company, the following remedies are available for resolving the issue:
1.Shareholders Agreement and/or Company MOI
The first step to resolving a shareholder dispute is to consult the Company’s Memorandum of Incorporation and/or Shareholders Agreement in order to ascertain the relevant steps to be taken,and guidelines to be followed.
- Companies Act 71 of 2008
In the event of there being no clause governing a shareholder dispute within the Company’s MOI and Shareholders Agreement, the provisions of the Companies Act may be utilized in order to effectively settle the dispute. - Negotiation and Mediation
An effective method of dispute resolution may be found through the appointment of an independent third-party, such as an expert in the field of the dispute which would facilitate and mediate the negotiation. A clause requiring the disputing parties to first mediate before approaching the courts can also be inserted into the Shareholders Agreements.
4. Formal Arbitration
If negotiation and mediation attempts prove to be unsuccessful,the parties can approach an arbitration body or submit a complaint to the Companies and Intellectual Property Commission (CIPC). The process of arbitration offers an alternative route to litigation, however, it involves its own costs and rules as well.
5. Litigation
Should alternative methods of dispute resolution fail in resolving the dispute, the disputing shareholder may approach the courts in order to seek relief. Such method of resolution should be carefully considered, especially given the lengthy time periods and cost implications associated with litigation.
Therefore, although there are many causes for shareholder disputes, it is evident that there are equally as many solutions.As may be seen from the above, the importance in having a comprehensive Shareholder’s Agreement, to regulate and provide effective shareholder dispute mechanisms, cannot be overstated.
Disclaimer: The opinions expressed in the article are solely there of the writer. All the rights of ZI Attorneys Inc. remain reserved. For assistance with any disputes akin, please contact us at ZI Attorneys Inc. on (010) 025 6000 / info@attorneys-at-law.org.za.
