Using Mediation To Resolve Shareholder Disputes
When ‘co-founders become co-flounders’. This post examines how mediation can be used to help resolve bitter shareholder disputes.
Disputes between co-founders happen for many reasons, such as:
> if the business is failing and each is blaming the other;
> if personnel, accounts, strategy or future direction can’t be agreed;
> if the business is succeeding and they’re fighting over the profits;
> if the co – founders have just grown apart or can’t stand working with each other; or
> if retirement is nearing and terms can’t be agreed
What happens next?
The key is to act quickly and without confrontation, to nip the problem in the bud. The longer it is left to fester the worse the problem becomes and the more costly it will be to resolve, in both time, stress, uncertainty and financially.
Sad though it is to say, people often put their heads in the sand and hope the problem will go away. Even experienced business people do this, in fact often they’re the worst culprits, as they’re too busy to stand back, take stock and look at the problem rationally
Small businesses are often very similar to a marriage. A 2016 Government survey found that more than half of all small and medium sized enterprises have only two partners or directors, this means that co-founders can often appear to be ‘married’ to each other in the business. Your business and personal lives can be interlinked. Sometimes that works – other times it doesn’t. So if / when it starts to go wrong because either or both of you want more (or less) or maybe it’s just that the novelty has worn off, it is necessary, like a failing marriage, to grasp the nettle and work together at a managed exit
Making the decision to mediate
Making the big decision to mediate is a brave step, rather than put your heads in the sand and hope it will go away. Or worse still, taking adversarial and confrontational positions, which in time can lead to litigation.
Well advised co-founders will have had a shareholders agreement drawn up before starting the business. This should be an important starting point to help determine the parameters of resolving the dispute. There will usually be a dispute resolution clause which often provides for mediation.
In my experience a negotiated, managed exit / separation is likely to provide the best outcome and ideally to help preserve the co-founders’ relationship, which in time may be healed. If litigation is the route it is likely that the relationship will be lost. After many years together that is often very sad.
Mediation is private and confidential and without prejudice, which means the parties are free to negotiate with the help and facilitation of the mediator to get to the point where they have shaped their own solution. If that happens, they can own the outcome and it is more likely to stick. With litigation there will one ‘winner’ and one loser , which will only embitter the loser. A managed solution is also usually better for the business, where client relationships can be preserved. Of course it is also possible that after having gone through a mediation process and having got to the root of the disagreements, the co-founders may be able to resolve their differences, amend the shareholders agreement, and continue with the business. Anything is possible with the right will on both sides. The role of the mediator is to act as a trusted, independent person who has the ear of both parties and can encourage dialogue between the parties, via him/her. Typically the parties will be in separate rooms after an initial opening session in the same room. The mediator would then shuttle between the parties, until ideally a solution can be reached.
The aim is to reach a settlement which both parties can live with and move on with their lives, either separately, or together if they decide to continue the business. This can then be incorporated in a settlement agreement or memorandum of understanding, setting out what each party has agreed and will do. As mediation is confidential it will limit the terms of the settlement to the parties and their legal advisors and anyone else they agree needs to know, so staff, customers and clients may never know.
As Churchill famously said “Jaw Jaw is better than War War” so if you can’t talk to each other, make use of and talk to a mediator!