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How to resolve shareholder disputes

BY JACOB MUTEVEDZI

What happens when the shareholders of a company fall out of love? When your relationship with fellow shareholders is no longer rosy, when the general meeting becomes a war zone and the boardroom looks like a gladiatorial arena, how do you proceed? Many a businessman does not want to reconcile with the grim reality that their closest business comrades now may be their worst enemies tomorrow. It is too bitter a pill to swallow. However, it is an unavoidable consequence of doing business that, at some point or another, shareholders will be locked in mortal corporate combat.

Therefore, it is prudent to agree on dispute resolution mechanisms. These dispute resolution methods are often contained in a document known as a shareholders’ agreement. A shareholders’ agreement is an agreement concluded between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders.

Lawyers often joke that concluding a shareholders’ agreement is not too different from signing a pre-nuptial contract. Conflict management devices should be embedded in your shareholders’ agreement from inception. These provisions minimise disputes and usually prevent them altogether. Failure to have dispute resolution mechanisms in place will cost you way more money than a good business lawyer would have charged to draft a shareholders’ agreement.

It is vital to ensure that your shareholders’ agreement is drafted by a competent business lawyer. In the majority of cases, shareholder disputes boil down to a difference of interpretation, amongst the various parties involved, of the provisions of the applicable shareholders’ agreement. Ambiguous and vague provisions breed conflict. Therefore, the easiest and cheapest way to prevent potential disputes is to draft clear and unequivocal shareholders’ agreements.

By forecasting all the possible scenarios where shareholders will need to make decisions and stipulating how those decisions should be reached, good shareholders’ agreements will minimise the likelihood of future disputes. This will save shareholders time, legal costs and unnecessary strife.

Binding arbitration comes highly recommended as an extremely efficient and effective way of resolving intra-company disputes. This is why “arbitration clauses” are a staple in shareholders’ agreements. An arbitration clause is a contractual provision specifying that any dispute must be resolved by way of arbitration.

An arbitration clause in the shareholders’ agreement is binding on the parties privy to the shareholders agreement. Creditors, employees and other contractors of the company are not privy to the shareholders’ agreement; therefore, they cannot invoke its provisions. Thus employees, for example, cannot insist on resolving their disputes with a corporate employer through an arbitration clause in a shareholders’ agreement.

Be that as it may, a difficult question presents itself. Shareholder disputes may arise and result in allegations of oppressive conduct or unfairly prejudicial conduct on the part of one shareholder against the interests of other shareholders. If a shareholder dispute which falls within the purview of the arbitration clause in a shareholders’ agreement arises, can the aggrieved shareholder seek relief from an arbitrator pursuant to the statutory oppression remedy provisions in the Companies and Other Business Entities Act [Chapter 24:31] (“the Act”)? Does an arbitrator have the power to grant such relief?

The arbitrability of shareholder disputes is a very important question for companies that have incorporated a mandatory arbitration clause in their shareholders’ agreement. “Arbitrability” refers to the notion of whether a dispute is capable of being resolved by arbitration. For instance, section 4 of the Arbitration Act [Chapter 7:15] enumerates matters that are not “arbitrable” which matters include matrimonial disputes (except with leave of the court), criminal matters and matters affecting the interests of minors.

Section 4 (3) of the Arbitration Act [Chapter 7:15] states that the fact that an enactment confers jurisdiction on a court or other tribunal to determine any matter shall not, on that ground alone, be construed as preventing the matter from being determined by arbitration. This suggests that shareholder disputes that fall within the jurisdiction of the court in terms of section 62 of the Act, for instance, are capable of resolution by arbitration.  Nonetheless, the vexed question that remains is whether or not an arbitrator can grant the statutory relief provided in the Act. I am not aware of any case in which our courts have addressed this question.

The position, however, appears to be settled in England. In Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855 the Court of Appeal decided that disputes arising under shareholder agreements can be referred to arbitration even though there is a statutory remedy for minority shareholder oppression in the Companies Act 2006. The Court of Appeal confirmed that there is no express or implied requirement in the UK Companies Act 2006 section 994 prohibiting the resolution by arbitration of disputes arising out of an unfair prejudice petition, and that public policy does not exclude arbitration as a means for resolving intra-company dispute in an unfair prejudice petition.

The Australian courts have adopted a similar position. In Re Infinite Plus Pty Ltd [2017] NSWSC 470, the New South Wales Supreme Court held that it will enforce arbitration agreements, even where the dispute includes elements of company law and the remedies sought by the parties may not be within the power of the arbitrator to grant. The position in Hong Kong is no different as demonstrated in the case of Quicksilver Greater China Ltd [2014] HKEC 1241.

Our courts would do well to follow this pro-arbitration stance. Not doing so will, in essence, render arbitration a paper tiger in the resolution of intra-company disputes. Arbitration is an efficient and effective method of resolving shareholder disputes. Sometimes court proceedings take too long; therefore, going to court may not be the wisest of decisions when conflict is practically burning your business to the ground. Arbitration allows you to get a swift resolution of shareholder issues while also offering a definitive solution for even the most challenging legal disputes.

  •  Jacob Mutevedzi is a commercial lawyer and arbitration practitioner. He can be contacted on jmutevedzi@gmail.com, on Twitter @jmutevedzi_ADR and on +263775987784. He writes in his personal capacity.

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