How to find solutions to stakeholder disputes in a climate of uncertainty

We are seeing, as you would expect in the current times, more disputes between shareholders, directors, partners and other stakeholders.

Unfortunately, sometimes these relate to companies, businesses, partnerships or trusts without clear rules for dispute resolution or exits, and the ability to achieve an outcome is uncertain.

Here are some solutions and strategies for you to consider if you (or your colleagues, family or friends) are facing disputes, or other difficulties relating to your businesses, whether or not you have relevant legal documentation.

Documents

One of the first things to check is whether there are any relevant rights or obligations regarding decision-making, dispute resolution or exits in an agreement or deed (such as a shareholders agreement, partnership agreement or employment agreement) or the constitutional documents of the relevant company or trust.

While these documents are strongly recommended, if you have no such documents, then the law may assist you to some extent.

In addition, where there are no agreed (appropriate) resolution or exit mechanisms, advisers can steer you to outcomes avoiding protracted legal proceedings as described below.

Governance and financing

In particular, look for relevant governance and financing matters in your documents including:

• rights to attend and vote at board, shareholder or other relevant meetings
• the ability to adjourn a meeting, prevent forming a quorum or argue that meetings have not taken place correctly
• a requirement for certain specific or groups of stakeholders to approve any particular actions
• the practical ability of the board or other stakeholders to prevent things from occurring
• the ability to appoint, remove or replace board members and other decision-makers
• any rights or obligations relating to providing finance or receiving dividends or other distributions.

Dispute resolution and deadlock

Consider any documented rights or obligations such as:

• any requirement to negotiate or resolve a dispute in good faith
• any agreed dispute process, such as mediation
• any particular requirements to sell or offer to sell (or rights to buy) stakes if there is a dispute or breach of a relevant agreement. These could have detailed processes or exotic names such as ‘Russian Roulette’ or ‘Texas Shootout’ and could start a bidding process between stakeholders.

Restraints

Carefully review any working or similar restraints or restrictions (such as non-competes, non-solicitation of customers, suppliers or employees, non-disparagement of the business or use of trading names) that apply to you or the other stakeholders either now or in the future (including following an exit).

These could have unintended consequences and might have more legal force than you anticipate.

Complying with other relevant terms and duties of employment (or similar engagement for example as a director or contractor) will also be important.

Exits

Significantly, there may be specific exit rights available in respect of one or more stakeholders such as:

• buyback rights — for example, allowing a company to buy back some shares
• drag along rights, to force the sale of all stakes on the same terms to an unrelated third-party
• tag along rights, to permit stakes to be sold on the same terms at the election of each stakeholder
• other sale rights including after a breach
• options to buy or sell stakes.

In some instances, it may be necessary to obtain an independent valuation of the stakes to be sold or the price could be a fixed dollar value or determined by reference to a formula.

Even if some of the above things have not previously been documented or agreed, they may still apply to some extent by law (for example, the Corporations Act or otherwise as briefly discussed below) or could be agreed as appropriate to resolve current or future matters.

Leverage and other solutions

Points of leverage or solutions in any negotiations might include:

• a decision or threat to resign
• any relevant terms of employment or other engagement
• relationships with customers and suppliers
• ownership of relevant premises, intellectual property or other critical assets
• any breach of confidentiality or other obligations or duties (including directors duties)
• any breach of warranties, misrepresentations or indemnity claims
• process advantages and disadvantages with exits
• enforcement of related party loans and security
• providing further finance or another commitment
• insolvency concerns
• tax implications and benefits.

It might also be possible to transfer, lease, licence or otherwise split relevant premises, assets, contracts and liabilities between stakeholders to resolve a dispute or achieve an exit.

Legal proceedings

In addition to breach of contract, directors duties or confidentiality obligations and insolvency laws, other relevant legal actions include those described below.

Disputes sometimes extend beyond (or arise from something other than) a breach of contract.

For example, misrepresentations between stakeholders about the products, services or assets of a business.

However, care and strategy are needed if you pursue such a claim to achieve your objectives.

Misrepresentations or misleading conduct claims, unless particularly strong, can indicate a party without a good legal position (such as a clear breach of contract case) and make them vulnerable.

Injunctions — where a court makes a preliminary order to prevent (or sometimes permit) something to preserve a position — can be used to resolve disputes.

For example, if one director proposes a board meeting to remove another director, and this is not being done in accordance with the constitution, the other may seek (or threaten) an injunction to prevent the meeting.

Where business relationships fail, a party often seeks to remove another from the business. A majority shareholder can sometimes use its voting superiority to do so.

For example, the majority shareholder may propose resolutions that dilute the other’s interest or alter the constitution to their advantage.

The law permits (among other things) liquidators or administrators to be appointed, companies to be wound up or shareholder stakes to be bought out.

Settling disputes

Thankfully, for most of our clients, their disputes are resolved or exits are achieved before legal action progresses to court hearings. The threat of legal proceedings is often enough to get the parties together to seek a solution.

We generally advise that a deed of settlement be carefully documented and properly executed by the parties to address all matters to the extent that they may be relevant (both to ensure that an agreed outcome occurs and to terminate ongoing liabilities).

Authors: Brendan Wykes & Bede Haines

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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