How to Anticipate Shareholder Disputes?
While no company is immune to shareholder disputes, it is possible to anticipate such situations through legal instruments such as the articles of association or a shareholders’ agreement. Dialogue remains essential to prevent these conflicts from jeopardising the company’s future.
Luxembourg is home to various types of companies, including holding companies that own groups of companies, sometimes operating abroad, as well as operational and family-owned businesses established locally. The nature of disputes within these companies can vary significantly.
“In the case of holding companies established in Luxembourg with operational activities in other countries, shareholders invest primarily for financial gain. Disputes are therefore generally financial in nature,” explains Philippe Sylvestre, Counsel at Brucher Thieltgen & Partners.
In family-owned companies, conflicts are not solely financial or related to dividend distributions. They are often emotional, arising from longstanding resentments, unresolved disagreements or even succession disputes.
“When the founder passes away or is no longer able to manage the business, their children may seek to demonstrate their ability to run the company. Changes in control and management can then occur. Their objective is to ensure the company’s long-term continuity while preserving the family assets.”
Harmful Consequences for the Company
In the short term, shareholder disputes can lead to a deadlock in the company’s operations.
A shareholder may, for example, resign from their position as director or manager following a disagreement, leaving the company without a functioning management body.
“The same situation may arise in a family-owned company when the founder passes away and the children are still too young to take over the business.”
Brucher Thieltgen & Partners can assist shareholders in managing such conflicts, particularly by seeking the appointment of a temporary administrator who can manage the company where its governing bodies are unable to function.
The appointment of a temporary administrator may ultimately lead to a negotiated settlement allowing one of the shareholders to exit the company or, more rarely, to the court ordering the company’s liquidation.
Liquidation remains a last resort, as it represents a particularly damaging outcome for all parties involved. Fortunately, such situations remain relatively uncommon.
“Shareholder disputes are often resolved through dialogue between the parties. This can be facilitated by the intervention of a temporary administrator, mediator or lawyer, with a view to reaching an agreement or identifying an exit strategy.” – Philippe Sylvestre
Anticipating Shareholder Disputes
Several legal instruments can help anticipate shareholder disputes or, at the very least, establish a framework for managing them.
In most cases, particularly when incorporating a company or welcoming a new investor, a shareholders’ agreement is drawn up to govern the relationships between shareholders.
Such agreements may also establish quorum and majority requirements within the board of directors.
“A shareholders’ agreement is a private contract between the company’s shareholders. It sets out rules governing their relationship but, more importantly, provides mechanisms for resolving deadlocks and facilitating an exit.
These may include share buyout clauses, restrictions on the transfer of shares, forced sale provisions or rights of first refusal.
A breach of the shareholders’ agreement may give rise to a claim for damages.”
Family-owned businesses generally do not have shareholders’ agreements, as founders often see little need for them when they retain sole control of the company.
Another important legal instrument is the company’s articles of association, which are publicly available and are generally drafted when the company is incorporated, as may be the shareholders’ agreement.
“They are accessible to third parties and provide information on how the company is governed. If a shareholder or director breaches the articles of association, they are also breaching the law.”
Giving Priority to Dialogue
As previously mentioned, when a shareholder dispute arises, the possibility of liquidating the company will inevitably be considered.
The court may appoint a liquidator responsible for finding buyers for the company’s assets, with the risk that those assets may be sold below their market value.
“No one benefits from reaching this stage. In most cases, shareholders eventually come to the negotiating table.
Mediation can help break the deadlock. After meeting with the parties separately and together, a mediator can suggest possible avenues for discussion, although they do not necessarily provide the solution themselves.”
The team at Brucher Thieltgen & Partners can help identify solutions, particularly by working with a temporary administrator appointed by the court.
The administrator’s role is to protect the interests of the company, which may sometimes differ from those of its shareholders.
Having observed the company’s operations and met with its employees, the administrator may be well placed to help identify potential solutions.
“When trust has broken down, an exit strategy must be found for the shareholders, such as the sale of all or part of the company’s share capital. The terms of such transactions are then negotiated by the lawyers.”
Brucher Thieltgen & Partners also aims to support companies before disputes arise, particularly by assisting them in drafting shareholders’ agreements.
“In some cases, shareholders’ agreements have been drafted by other law firms specialising in corporate structuring, but which may not necessarily have considered the potential litigation implications.
Clients then come to our firm when a decision has been taken by the board of directors or the general meeting of shareholders that goes against their interests,” concludes Philippe Sylvestre.
Philippe Sylvestre, Partner : philippe.sylvestre@btplawyers.lu