Shareholders disputes arise in lack of a clear agreement between the parties and will usually cause damage to the value of the company beucase of lack of attention to the matters of the company and sometimes even due to intentional damage by one of the parties. Such disagreements have solutions, but just as any terminal illness, it is important to handle them as early as possible. When an issue is directed to a professional at an early stage, in most cases the problem is solvable. When the issue is brought before a judge or arbitrator who is not an expert in the specific field, usually the “package” is dissolved - an extreme solution that may be avoided if the issue is handled by an expert in the field.
There are many types of incorporations. A young entrepreneur and a wealthy person, family members, friends or any other combination. Most incorporators prefer to “start working” while skipping an important and integral stage of the process: setting out the corporate relationship and rights between the parties by consulting with a corporate expert in advance. Most believe that mutual cooperation and success will overcome any disagreement or conflict although the reality proves the opposite. Some shareholders contend that once they contributed everything they could, the other shareholders saw them as a “nuisance”. For example, a real estate entrepreneur who worked hard to obtain the land, solved planning issues, progressed the construction work and delivered a large building to his partners whom from now on will have control of the management of the company, becomes at such point a non-contributing party or a nuisance. Such is the case where a software developer entrepreneur “stays behind” while the shareholders and managers of the company are feeling “disturbed” by the party who “ended” his contribution and is now “burdening” the management of the company. Such circumstance provoke the desire to “squeeze out” such shareholder. Although a wide range of possible solutions (on which we will not elaborate herein) exist, the Courts and arbitrators tend order separation. Whatever the circumstances may be, decisions such as who should leave and how much will be paid for this are decisions that raise difficult questions, demand a significant investment of time and resources from the company and all shareholders and may cause a conflict of interests. Such terminal solutions are also not always necessary.
When dealing with private companies, one of the main issues is the fact that in most cases the shareholders are the initial founders of the company, they are recognized as such and it is difficult for them to separate between their effort as employees, their rights as shareholders and obligations as officers of a company. The multiple “hats” they wear combined with the lack of legal advice or legal advice given by the “in-house attorney” instead of a corporate expert, causes them to take into account different considerations, some of which irrelevant, while breaching the corporate law. This issue is the main conflict-raiser and any solution, agreement in advance or dispute resolution in retrospect, can and should be cope with such entanglement. A solutions for such conflicts can be reached in advance or in retrospect: in advance, through a clear and detailed contract prepared in cooperation with the parties by an expert in the field (which can include mechanisms such as BMBY (Buy-Me-Buy-You) or any other separation mechanism or conflict solving mechanism which does not include separation). In retrospect, by referring to an expert in the field which will make decisions for the parties and assist in resolving the conflict.
It is important to emphasize that neglecting the issue will not make it go away, and just as it is important to urgently take care and attend to the first symptoms of a terminal illness, such is the case with conflicts between shareholders. Just as when dealing with the human body, we need to refer to a specialist, and as soon as possible.
Published in Afik News 079 06.07.2011