Dispute Resolution

[The Resolver]

Whilst under-funding, under-resourcing, under-preparing and over-trading may all be present in many stories of business failure, the more common threat to the success of all companies is under-resolving.

Regulars in the legal section know how much I bang on about the importance in best practice when trading under a limited company of having a Shareholders Agreement (or for those trading in partnership, a detailed Partnership Agreement). Whilst Shareholders Agreement is not a legal requirement (unlike the Articles of Association) it is common sense to set out in writing as much as possible, at a time when all shareholders/partners are feeling positive and very much in tune with each other, what provisions should apply should certain events take place in the future or should disagreements be reached.

Far too many companies fail simply because the owners begin to work less as a team and start to distrust each other. Stalemates, especially in 50/50 share split companies, can drain a company. These problems are readily picked up on staff radar so they also begin to lose motivation.

The Articles of Association are the rulebook but they are very limited in what they cover. A Shareholders Agreement is a opportunity to significantly expand on the rules and , importantly, in a private way since unlike the Articles, the Shareholders Agreement is not disclosed to the public at Companies House. It can also be changed very easily by simple agreement between the shareholders.

I am not going to set out here all the sort of subjects that can be covered but these are set out on my sites at www.TheResolver.com (where many of my UKBF posts are available) and www.BoardroomResolve.com

Another aspect of best practice is to ensure you all fully understand the Articles. Its more often the case than not that clients who come to me to help resolve their differences have never read or understood their own Articles. These , and any Shareholders Agreement, are the rules. You wouldn't play a game ,whether chess or Monopoly, or play a sport without understanding the rules so why run a business in that way?

Having a dispute resolution policy also applies when dealing with the outside world, especially customers and suppliers. With the growth in impact of adverse customer reviews it is more vital than ever to ensure you resolve customer complaints quickly. My ODR (Online Dispute Resolution Company), Modria, is a spin off from eBay/PayPal and the ex-eBay/PayPal colleagues have shown me case studies that prove conclusively that those traders who positively engage with unhappy customers in dispute resolution processes outside of the courts, gain from increased repeat business from such customers even from those customers for whom the complaint resolved against them. It is the fact that the trader was prepared to engage with them in a fair dispute resolution process that gave them increased confidence and trust for the future.

This dispute resolution message has been taken on board by the European Union who have recently passed a new law that will in 2015 require e-traders to link customers to ODR services (and require dispute resolution services for consumers to operate online). The most senior judge in England and Wales has last month urged the courts to make use of ODR and the IT Adviser to the Lord Chief Justice has written that all but the most complex and highest value dispute will in future be resolved through ODR.

Companies can gain advantage with customers by embracing ODR now as part of their business model. But in any event, given the financial drain of litigation, having a policy that follows non-court DR processes, such as mediation, and fixing them into the terms and conditions of business, is clearly best practice in business. This is not simply because it reduces the legal costs bill, but businesses who resolve their disputes with supply chain partners through mediation are much more likely to retain the business relationship for the future. After all there is little point in suing a customer, since, if you win, the monies they owe you will pale into insignificance compared to what you suffer financially from the business lost to that customer in the future. Much better to reach a resolution that pays something and commits to further business in the future. A policy for resolving disputes outside of court helps businesses build up their customer base whereas one that tends to threaten court action at everyone who is late paying sheds customers.

 

[Deleted member 162294]

I suppose when you're partnering with others in business it's hard to setup a shareholders agreement at any point because it's implicitly saying "maybe we don't trust each other" and throws the future of the business in jeopardy. Somewhat like asking for a prenuptial agreement before marriage.

 

[The Resolver]

Not quite. Whilst some provisions provide for the better resolution of disputes, eg deadlock clauses, mediation clauses etc, most of the other clauses set out what should happen when certain events take place. It is the fact that you have addressed these potential events and agreed a process that prevents disputes arising in the first place. So there is no need to describe them in the context fo disputes. It happens that their value lies in avoiding disputes.

 

[The Developer]

I would be interested in any advice you have for partners working together before things become a big problem. Do you have guidelines for ways of working together to avoid things escalating?

 

[The Resolver]

Absolutely. The first thing to do is set out in a document a clear agreement as to who does what in the business.

Next is some clear agreements on how profit is to be shared and the relationship, if any, that has to the level of input (many fall outs start with one partner thinking he is doing all the work whereas value added to the business is a better criteria than time spent ).

A very detailed arrangement should be agreed to on how to resolve disagreements , whether on forward policy or issues. This can involve a series of meetings ,requirements for each party to set out their case with a gentle escalation culminating ideally in mediation or even an adjudication by a trusted third party.

You would also want to agree to what should happen on certain events eg when one partner wishes to leave- to include how his interest is to be valued and by whom.

You should also cover what restraint you want to agree on working outside the business if at all.

There are many other issues that it would be possible at the outset to reach an agreement on as what to do. Having this rule book as a guide, means that not only will there will be less stalemate disagreements but , knowing the rules, you will be less likely to create a situation which may lead to disagreement in the first place.

 

[The Developer]

My partner and I discussed plans vaguely similar to your suggestions, but we have not yet made the outcome official. You have also covered some areas which I had not considered yet. Specifically what to do if one partner wants to leave the business, or how we treat working outside of the business.

I will present what you have said here to him and we can discuss other potential problems we can agree actions for. Hopefully this will help us deal with any problems in a much more structured way and a positive way which avoids bad feeling and stress.

It is very kind of you to share your experience so openly Graham, I really appreciate it.

 

[The Resolver]

I should add that if you go into partnership and do not enter into an Agreement to cover your own rules then you are governed by a 123 yr old statute (http://www.legislation.gov.uk/ukpga/Vict/53-54/39/contents) and you need to understand it .

PM me if you need any help with drawing up the document

 

[Naveed123]

The bussines of UK is going good and good day by day because of their hard work...

 

[templateagreements]

Agreed with The Resolver. Many, many posts about shareholder disputes on forums like this raise the question: 'Do you have a shareholder agreement in place?'. The answer of course is almost always no because like The Resolver says the real value of such an agreement is to avoid the dispute in the first place. Regarding the comment about the prenuptial agreement, a shareholders agreement is certainly more accepted as most people understand the need in any business to set out and agree the rules of doing business together before starting up. Additionally having a good shareholders agreement in place looks much better (and is generally expected) if you anticipate involving additional third-parties later (eg for financing).

Aside from relying on the provisions in the Partnership Act, there are a few options for setting up a shareholders agreement.

1) Some people are happy to bake something together from some random Delaware jurisdiction template they have found online. I mention this because I hear about it happening far too often. You could argue it's better than nothing, but never recommended obviously.

2) Download a very cheap template from a decent UK vendor (queue my plug for our shareholders agreement template for £2.99). Although many people choose not to, it is always recommended that a template is checked by a qualified solicitor to ensure it covers your particular situation.

3) Buying a semi-DIY shareholders agreement, whereby you follow a questionnaire and some limited assistance from a qualified professional which results in a template that is optimised for your situation and requirements. The Resolver provides this type of service (see Resolver page on Shareholders Agreement) for £175, which in my opinion is very reasonable.

4) Hiring a solicitor to do a bespoke shareholders agreement, which is obviously the best option if you can afford it (The Resolver charges £750, which in my opinion is very reasonable for an experienced solicitor).

Whatever the option chosen, it can never be stressed enough that a shareholders agreement is fundamentally important to any business, however confident people are in the beginning that everything 'will work out alright'. A shareholders agreement adds value and reduces stress on any business and its owners by reducing the risk of disputes and misunderstandings.

 

[lellis]

it is generally considered good practice to prepare heads of terms first before diving in and trying to settle the detailed provisions of a shareholders agreement. The heads of terms can "force" early discussion on matters such as The Developer says - particularly dispute resolution. Better to provide a mechanism in the agreement upfront than to leave it until there is a breakdown of relationship. The paradox with contracts is that no-one needs them unless there is a disagreement; when you do need them, the more matters they cater for (and some of main ones are boilerplate provisions) to narrow disputes (such as the process for resolving them) in the beginning the better. That's where The Resolver steps in.

 

[The Resolver]

it is generally considered good practice to prepare heads of terms first before diving in and trying to settle the detailed provisions of a shareholders agreement.

Heads of Agreement (or Terms), a non-binding setting out of the basics of what wants to achieve, is usually impractical when trying to agree on a Shareholders Agreement. They are used more when, say, two companies are trying to reach a business deal between them, the dynamics of which they will be more familiar with than those asked to draw up the formal Agreement. Many of the terms on a Shareholders Agreement will be on issues that the clients will not have addressed and which ,in some cases, are impacted by the law of which they may not be fully aware. They will need much more guidance here than in a business to business 'deal'. The person instructed to draw up the Shareholders Agreement may just as well draft the final document once he has discussed fully and explained suitable terms. When clients buy my DIY Assisted Shareholders Agreement they are taken through a 35 point questionnaire that explains suggested terms to make it easier for them to decide which to use.

The paradox with contracts is that no-one needs them unless there is a disagreement; when you do need them, the more matters they cater for (and some of main ones are boilerplate provisions) to narrow disputes (such as the process for resolving them) in the beginning the better. That's where The Resolver steps in.

The majority of the content of a Shareholders Agreement are not about resolving disputes but are simply helping the parties decide on matters that may not have occurred to them when forming the company, eg having higher voting requirements for certain types of Resolutions, providing access to more financial information for non-director shareholders than they are given by the law, agreeing on control and ownership of social networking assets ,particularly when someone leaves (see my legal news re LinkedIn accounts) and of course a method for valuing the shares to assist future negotiations of inter-shareholder transfers etc

 

[praveenchandra]

Please share some more details about the topic.

 

[StuartDavidson]

I had a similar situation so now use Docracy for all my new clients. Not sure how enforceable it could be if challenged, but I think it seems to put enough doubt in minds that people stick to the terms like glue!

 

[peggyprice]

I suppose when you're partnering with others in business it's hard to setup a shareholders agreement at any point because it's implicitly saying "maybe we don't trust each other" and throws the future of the business in jeopardy. Somewhat like asking for a prenuptial agreement before marriage.

To be honest, if I was going into business with someone (regardless whether friend, colleague or life partner) who got upset at the prospect of defining a shareholders' agreement, I think I'd start questioning whether they were businesslike enough to go into business with in the first place...!

A friend found herself in a horribly messy situation with her business partner; the shareholders' agreement saved not only her business but also her home and probably everything that went with it. It may seem an expense too far when you're setting up, but just think of the risks of finding out loo late that you need it...

 

[The Resolver]

Its not a bit like a pre-nuptial agreement and certainly nothing to do with trust. A pre-nuptial sets out a solution in advance. A Shareholders Agreements sets out many terms that would not have been considered otherwise and thus provides a way to proceed. For example, it will say what happens if any shareholder wishes to resign from employment by the company or from the Board. It will set out a system to follow when one shareholder wishes to leave and sell his shares. It will say what happens on death. It will add rules that the law ignores eg to give non-directors access to financial information not otherwise available to non-directors. There is so much more that one can include. It just gives a clear set of rules without which disputes are much more likely to occur.

Running a company without a Shareholders Agreement is just plain foolish - period.