How to handle disputes between shareholders? (Or death of a shareholder)

Reasons for shareholder disputes:

Common reasons for shareholder disputes are disagreement with the management or company’s direction, conflicts of interest or fraudulent activities. Above all removing a shareholder from a limited company is often rocky and it causes tension among business partners. Hence adding a dispute resolution clause in the shareholder’s agreement or articles can save a great deal of time and money.

1. Steps to handle disputes between shareholders:

1.1. Mediation:

The first course of action in the event of a dispute is mediation. Mediation through an independent neutral arbitrator avoids further dispute escalation. If mediation fails, the articles can have a structure that instructs shareholders to quit. During the negotiation, the minority shareholder can be offered fair value. If mediation fails, then drastic measures like winding up the company can be taken.

1.2. Winding up the company:

Winding up the company (company dissolution) would be the right option if a company is insolvent. Majority shareholders can initiate a voluntary liquidation and companies’ assets can be transferred to a new company excluding the departing shareholder. To wind up the company, a special resolution has to be passed with a 75% vote of the majority shareholders. This would be the best solution in certain situations though it is time-consuming and costly.

2. The death of a shareholder:

Many big companies include provisions in shareholders’ agreements to cope with a shareholder’s death. If a shareholder dies, the right to his shares may pass on to a named beneficiary under the terms of his binding declaration or will. The ownership to the shares has to be legally handed over to the inheritor by completing a stock transfer form.

Best advice to avoid such an ordeal is by drafting a valid shareholders agreement with all possible regulations. It helps to bypass any interruption and provides greater protection to shareholders.

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