Resolving Shareholder and Boardroom Disputes
Incidents of shareholder and boardroom disputes are commonplace in both public and private companies. The causes of such disputes are varied and will generally involve: breach or lack of trust between shareholders or directors; dishonesty, embezzlement or misappropriation of funds and theft of company’s assets; difference of opinion arising from failure to agree on key management or governance issues; disagreements relating to operations issues like dates or agenda for meetings or even bank signatories and their mandates; dispute related to breach of the provisions of the company’s constitutive documents or the Companies Act; breach of provisions of a shareholders’ agreement; disagreements related to shareholders’ or directors’ rights or obligations in the company; perceived or actual conflict of interest situations, personal wrangles or feuds between the shareholders or directors; oppression of the minority; or abuse of office, particularly by the majority shareholder(s).
As is the case elsewhere in the world, in Kenya many businesses are started by family members or friends. Initially, such persons do not have elaborate governance and management structures. In addition, in such social enterprises most of the major decisions are made informally, either collegially or by one of the shareholders or directors. In addition, in most cases all shareholders and directors are involved in the day-to -day affairs of the company as well as in the making of key decisions.
Inevitably, as the business thrives or years wear on, it is common for shareholders or directors to pull in different directions. Many times, the collegiality ends resulting in disputes of all kind. It is thus imperative to employ and put in place measures to anticipate and address such disputes with a view to preserve the business as a going concern. The following options are available to resolve such disputes:
Share buyback and cancellation
This refers to the re-purchase of shares by the company at hand. The major advantage of this method is that the acquisition cost is borne by the company. Subsequently, the shares of an outgoing shareholder(s) are cancelled and transferred to the remaining shareholders. A share buyback must however be approved by at least 75% of shareholders.
Variation of Rights
This is a creative solution whereby certain rights of a class of shares are varied or withdrawn to suit the desired outcome. For instance, one shareholder may decide to cede control of management in consideration of retaining some income or capital rights. This may be popular with a founder shareholder who may be looking to step aside from management but retain some financial reward for their work.
Splitting of the Businesses
In this method, the company’s businesses or business divisions are split up and reorganized to enable the shareholders get their separate businesses. There are many options and choices all of which dependent of the specific case at hand as well as other imperatives including taxation.
Deferred Payout or Kind Consideration
Where cash flow is the problem, the consideration payable for shares can be deferred or paid in kind.
Buy out based on independent valuation of the shares
A buy out or exit by one shareholder may be inevitable if the acrimony between shareholders persists. However, many times the shareholders will even disagree on the price payable for shares. In such instances, parties can agree in a separate agreement, on the method to be used to determine the value of the shares. This usually involves a professional valuer or a panel of valuers and the company auditors. Parties agree on methods of valuation or guidelines thereof including but not limited to the timelines, the payment terms of the agreed consideration and resolution of any disputes arising from the valuation process.
As a last resort, shareholder can resort to court action. These may include a derivative action which is a suit commenced by a member on behalf of the company only in respect of a cause of action arising from ‘an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company’. The other type of court action relates to a suit for oppressive conduct which may be initiated by a member of the company or the Honorable Attorney General where the conduct of the affairs of the company or a proposed action is contrary to the interest of the members as a whole or unfairly prejudicial to and against members generally or to a section of its members. Other options include seeking injunctive orders to mitigate further prejudice either to the concerned shareholder or the company.
Applying for the winding up of the Company is the most drastic action that can be used in resolution of a shareholders’ dispute. This is a remedy of last resort and one which ought not to be granted if some other less drastic form of relief is available and appropriate.
Boardroom or shareholder disputes are common. Fortunately, as explained above there are number of options that are available including litigious and non-litigious methods. Nonetheless, in my experience, deliberate action in inculcating and adopting good corporate governance structures in your business as well as adopting efficient business models will go a long way in avoid these unnecessary disputes which many a time affect the business negatively. We have curated our practice to include routine checks to identify such loopholes which would negatively affect the business.
Be that as it may, with swift action and the tactical use of legal proceedings, disputes can often be resolved in a way that allows the members to either part ways or recalibrate their relationship productively and continue running the business together.