Why Partnership And Shareholder Disputes Happen - And How To Get Ahead Of Them
Let’s talk about divorce. One widely cited study, Reasons for Divorce and Recollections of Premarital Intervention: Implications for Improving Relationship Education, names these top 5 reasons for divorce:
- Lack of commitment
- Infidelity or extramarital affairs
- Too much conflict and arguing
- Getting married too young
- Financial problems
There are no widely cited studies on why partnership and shareholder disputes happen, but our experience in the world of mergers and acquisitions tells us that a lot of these top reasons apply to why business partnerships dissolve.
Lack of commitment? Absolutely - one of the partners sees some other attractive opportunity or gets consumed by other priorities, and suddenly you have a partner who isn’t pulling their weight.
Infidelity? Same idea - many entrepreneurs have several different ventures, and if they’re working on their side piece, they might not give your business the commitment it needs.
We’ll skip over “too much conflict and arguing” because that’s what we’re trying to address in this whole article.
Getting married too young: It happens in the business world, too. Two entrepreneurs, bright-eyed and bushy-tailed, start a business together, only to find the sometimes harrowing realities of business ownership are too much to take.
Financial problems can exacerbate partnership stress - and these are often an even bigger factor in the dissolution of partnerships and corporations than they are in marriages.
Finally, sometimes we just marry the wrong person. Selecting a partner requires a thorough assessment of their objectives, their values, morals, and ethics, and your ability to work through often difficult and stressful matters that arise. Often partnerships are formed without thorough consideration of all the important factors - but eventually they surface.
Partnership Agreements & Shareholder Agreements: Business Prenups
Getting a prenup isn’t romantic, but it’s a great way to protect your assets in a marriage. The same is true for partnership agreements and shareholder agreements - but they’re even better than prenups because they explicitly spell out some of the responsibilities that partners and shareholders will have.
Partnership and shareholder agreements might include:
- Rules about how interests in the company can be transferred, and to whom
- Clauses about which decisions require a unanimous decision by all parties (or other special requirements, like a 2/3rds majority)
- Insurance requirements for partners and key team members
- Continuity clauses so that the agreement persists even if shareholders or partners are added or leave
- Descriptions of how the partnership or corporation’s income will be distributed among partners, how shares are distributed, the nature of those shares, and more
These agreements are highly customizable; our team can help you determine what clauses you’ll want to include in your partnership or shareholder agreement. Ideally, you’ll draft one before your business is even formed (or before a joint venture or other partnership is signed into being). Don’t have one? Write one up as soon as possible - before any disputes happen!
Leverage Your Partnership Or Shareholder Agreement To Settle Conflicts
When you have a partnership agreement or shareholder agreement in place, a lot of conflicts become easier to solve. Don’t have a consensus on a business decision? Your partnership agreement will tell you whether or not you need unanimity. One shareholder trying to buy out another for pennies on the dollar? When your partnership agreement has a shotgun clause, they might be less inclined to low-ball.
Partnership agreements can even give you rules on what to do if a partner dies or retires; those rules might help you avoid a business divorce and an actual divorce, depending on the circumstances of the other party’s retirement.
No Agreement In Place? Here’s How To Protect Your Business Interests
I can’t stress this enough: The number one way to protect your business from partnership or shareholder conflicts if you do not have an agreement in place is to draft an agreement. I can help you. My partners at Catchfire can help you. Get in touch with us.
When the disputes start, and you don’t have a partnership agreement in place, get a lawyer right away. They’ll help protect you and your business interests. You’ll also want to dedicate time and energy to ensuring that the dispute is resolved amicably; in the rest of this article, we’ll talk about some effective tactics for doing so (and what to do if those tactics fail).
The Power Of Open Communication In Resolving Business Disputes
What does each party want? If you could wave your hand and give everyone everything they needed to end the dispute, what would that look like? You need clearly defined terms in order to successfully resolve disputes, so it’s important to sit down with all shareholders and get a better understanding of their wants and needs; once you know those terms, negotiations can start.
Regular meetings with all shareholders, and updates that include information about performance, opportunities, challenges, and expectations can help avoid conflicts; during periods of conflict, they help ensure that no one feels left out, and reduce the likelihood of the conflict getting worse.
Mediation And Arbitration
There are times when open dialogue and conversation just won’t get you there. I encourage you to have a lawyer, but to resist the urge to immediately run to that lawyer and try to sue your partners. Finding ways to make things work amicably is almost always the best route.
That’s where mediation and arbitration come in:
In mediation, you hire a third party (a mediator) to help all parties talk through their disputes and try to come to a resolution. Your mileage may vary with different mediators (we can help you find a good one), but the goals of mediation are laudable - if you successfully resolve your disputes, you can preserve business relationships (and friendships) better than if you were to take formal legal action.
A more serious and legally binding alternative to mediation is arbitration. A third party or third parties (an arbitrator or a panel) reviews all of the evidence and makes a legally binding decision on how to resolve the dispute. There are three big advantages to arbitration: It’s faster than going to court, it’s typically less expensive, and it helps keep everything under wraps, which is important for preserving your brand.
When To Take Partnership Or Shareholder Disputes To Litigation
When all else fails, litigation may be required. You want to avoid this step if you can because:
- It’s public
- It can be messy
- It can be expensive
- It can lead to burning bridges
Litigation is a last resort, but it’s not without its merits; evidence will be accepted and carefully considered before a judgment is made, and if you’re fairly certain you’re on the right side of the law, it can be a good way of getting what’s owed to you. Here are some circumstances where litigation might be necessary:
- Breach of contract
- Breach of partnership agreement or shareholder agreement
- Breach of fiduciary duty
- Fraud
- Tort
Anything from controlling shareholders taking actions that hurt the business (and thus minority shareholders) to partners poaching clients for their other businesses can be grounds for litigation. There are too many different circumstances to list here - but in some cases, negotiations, mediation, and arbitration will clearly not suffice from the get-go.
Practical Conflict Management Tips Every Business Owner Should Know
When managing conflict between shareholders and partners, you should:
- Keep an open mind.
- Believe that there is a resolution that will satisfy all parties.
- Write everything down - if it comes to mediation, arbitration, or litigation, you’ll want a paper trail.
- Know when to take a step back; if you’re too emotional, it could hinder negotiations. Stop if you need to.
- Be open and honest. Feeling good about how things are going? Let others know. Not satisfied with how a meeting went? Let them know that, too - and encourage honesty from others.
- Have a lawyer available, but don’t use them to threaten litigation (at least, not at first); instead, consult with them regularly about how the dispute is progressing.
- Talk to a mentor. Our strategic executive coaching and business consulting services can help you navigate disputes - and give you someone to talk through your frustrations with, without hampering the possibility of reaching a deal.
Take Action Today - Get Professional Help To Resolve Your Dispute
Dealing with a dispute between partners or shareholders? Did you read this article out of curiosity and realize it’s really important to have a partnership agreement in place?
Call Catchfire today for business consulting services in Winnipeg. We can help you create shareholder agreements and partnership agreements; if there are disputes, our team can help you solve them. We’ll give you advice, connect you with third parties we know (from mediators to lawyers), and help you through the whole experience.