What are the main reasons for the rise of shareholder disagreements and how can they be resolved in advance?

Shareholders of significant organisations (but not excluding smaller ones) will usually be confronted with difficult situations when it comes to the development and direction of the corporation, the visions of the board in different management and control matters, profit distributions, alleged breach of duties and even interests of different parties within the company. Such situations will usually lead shareholders to the unfortunate position of entering into shareholder disputes that may sometimes place at risk the interests of the company itself. Nevertheless, conflicts are considered to be part of every corporate relationship. It is important to stress the need to be able to resolve such disputes in advance.

Before examining the different mechanisms for shareholder dispute resolution on an early stage it is important to ask ourselves: why do shareholder disputes escalate? Of course, disputes escalate because the parties involved do not usually feel the need to appoint advisors or make new director appointments to find the different solutions available for them.

The following is a non-exclusive list of possible causes that can lead to shareholder disputes

Breach of shareholder agreements

Breach of shareholder agreements is considered to be the main cause of shareholder disputes in Cyprus. A shareholder agreement will have as its goal to regulate the shareholders’ venture, rights and obligations with regards to the company. A shareholders’ agreement, therefore, establishes different aspects of the company’s operations such as the shareholders’ voting rights and under which circumstances, they will be legally entitled to sell their shares; or under which circumstances shareholders’ decisions are required and at what percentages, how the board of directors will operate and within what limits, etc. Consequently, if any of the company’s shareholders avoid or misappropriate any of the duties or obligations they are required to perform under such agreement, they will be breaching the agreement itself. Such a breach will most of the time create a dispute between the company’s shareholders.

Management and control of the company’s operations

It is easy for more disputes to arise between shareholders, especially when more than one individual is involved in the running and control of a business. It is in the human nature to have different opinions with regards to what is right or wrong in a specific situation or what are the arguments to be considered in taking a decision concerning the company’s affairs and its future. As a result, it is extremely easy for disputes to arise between shareholders of different opinion and ideas.

Breach of shareholders’ fiduciary duties

It is important for shareholders’ fiduciary duties to be correctly executed and followed. Shareholder duties that are not performed or followed and may affect other shareholders, bringing them to a disadvantage in relation to others, will likely cause shareholder disputes.

The minority shareholders role in the business decision-making process of the company

Minority shareholders, due to the nature of their role in the business, have little to no effect in the decision-making process of the company. As a result, minority shareholders will usually protest that the business affairs are being contacted in an approach which is oppressive to some other shareholders. Cyprus law gives rights to such minority shareholders to apply to the Cyprus Courts for protection and action.

The mechanisms available for shareholder dispute resolution

1. First and foremost, drafting unambiguous key company documents when there is still a chance to negotiate an agreement and determine the limits and powers on decision making abilities, is crucial. This will be extremely difficult to achieve when a dispute has already arisen. In such case shareholders need to examine thoroughly the company’s constitutional documents. These may be the company’s Articles of Association (AOA) or other independent shareholder agreements. For example, where a dispute arises between shareholders about a particular breach of duties, the company’s AOA, will usually include a provision forcing shareholders to sell their shares at a specific valuation in specified cases. This will leave the shareholder under breach with no room to argue about not selling their shares of the company.
2. Convening an extraordinary general meeting (EGM) is as important as checking the company’s AOA and shareholder agreements. Shareholders have the right to request an EGM under section 126 of the Cyprus Companies Law Cap 113. This can be an opportunity to resolve disputes between shareholders, through civilized discussion, while such disputes are still at an early stage.
3. Negotiation can be effective in ensuring that complex and high value shareholder disputes do not become unmanageable sooner or later. Determined and well-advised shareholders will be able to negotiate more advantageous possible exits. By using the method of negotiation time consuming and expensive legal proceedings can be set aside.
4. Using Mediation or other Alternative Dispute Resolution (ADR) mechanisms will be extremely useful when it comes to renegotiating an agreement, given that the dispute clearly concerns that agreement. As businesses face difficulties due to the fact that some agreements simply cannot be performed in a difficult economic environment, mediation will in every case be a helpful tool. The appointed professional mediator will usually be someone with experience in the particular area of law where the dispute falls in. If an agreement is reached with the assistance of the mediator, this will be recorded in a legally binding document which can later be enforced in the Cyprus court. It is important to note that in case the agreement is in breach, such agreement must be submitted to the court mutually by the parties involved or by one of the parties with the consent of the other party. More importantly, mediators can provide a third-party view and solution to a situation that would not otherwise be obvious to the clouded minds of shareholders in dispute.

At A.G. Paphitis & Co. LLC we can provide legal advice on dealing with shareholder disputes in Cyprus companies. This includes advice on how shareholders can engage in negotiation and avoid such situations in advance but also guidance on how to deal with shareholder disputes that seem impossible to resolve through dialog and reasonable negotiation. Our professionals can act as mediators and help clients reach reasonable agreements through mediation. We can also represent clients at the court in case such agreements are breached and at the same time provide support through the enforcement procedure.

The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.

Should you have any questions please contact us.

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