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    • Tag: Disputes

    Shareholder Disputes: An Overview of Three Procedures to Achieve a Business Divorce

    While business partners will usually be totally optimistic at the time of start-up, it is important to provide for a solution to unresolvable disagreements. This post considers three different solutions by which business partners can go their separate ways. Each of these establishes a procedure whereby one shareholder can buy out the other shareholder(s) or force the other shareholder(s) to buy, or require the other shareholders to co-operate in a sale of all shares in the business.

    1) Shotgun Provision

    The “shotgun” is the most commonly used provisions in shareholder agreements and works best with two shareholders, although it can work with more shareholders. Under this provision, one shareholder presents another shareholder with an offer to purchase all of the other shareholder’s shares in the business at a specified price. The other shareholder then has two options:

                i) sell all of the other shareholder’s shares in the business to the offering shareholder at the specified price; (or)

    ii) buy all of the offering shareholder’s shares in the business at the same price.

    This result is that the offering shareholder is either bought out or ends up owning 100% of the business. The shareholders’ agreement will usually, or should, set out all of the terms that will apply to any sale.

    There are some potential disadvantages of shotgun provisions. First and foremost, they are not ideal if there is disparity between the economic strength of the shareholders. If one shareholder has considerably more financial means than the other(s), a shotgun provision can result in a situation where a stronger party can effectively force a weaker party to sell shares to the stronger party for consideration below market value. Another issue to be considered is where one of the shareholders has considerable operating knowledge about the business that might put the other partner, especially a passive partner, at a disadvantage by having to step into managing the business when they have no past experience or contacts with the customers or suppliers.

    Furthermore, a shotgun provision may not be ideal in the early stages of a business. One party could choose to exit or force another party out before the business has gained much value. To avoid this, it is recommended that a provision be included in the agreement that states that the “shotgun” provision, or for that matter any similar provision, may not be exercised until after the business has been operating for a certain period of time, say three to five years.

    2) Put option, with option to buy or cause sale of 100% of business

    One alternative to the shotgun provision is to provide the shareholders with a ‘put option’.  This enables a shareholder (an “Offering Shareholder”) to request that the other shareholder(s) purchase the shares owned by the Offering Shareholder at a price specified by the Offering Shareholder.   If the other shareholder(s) decide not to buy the Offering Shareholder’s shares, the Offering Shareholder has the option to buy the shares owned by the other shareholder(s) or cause the sale of 100% of the shares of the company.

    The advantage of this provision over the shotgun provision is that the Offering Shareholder cannot find himself forced to be the buyer. There is, however, still a risk that the other shareholder(s) may refuse to co-operate in a sale of 100% of the shares of the Company, however the agreement can contain penalties for refusal to co-operate.

    3) Private Auction Provision

    Under a private auction, one shareholder can require that all shares in the business be placed on auction. Only the shareholders can bid at the auction. A minimum starting price and minimum bid increments can be set. The auction continues until one shareholder’s bid is accepted by the other shareholder(s) or the other shareholder(s) do not respond with a higher bid.

    Essentially this is a variation of the shotgun provision, that provides all shareholders with more control over the price at which shares in the business are ultimately bought or sold. The private auction also reduces the risk of stronger economic parties taking advantage of weaker economic parties because it increases the likelihood that a buyout will occur close to the market value of the shares.

    Summary

    There are a variety of provisions that can be used in shareholder agreements to govern shareholder buyouts or provide for the sale of a company in the event of a breakdown in the relationship between shareholders. To further discuss these provisions or other aspects of shareholder agreements, please contact Frank Shostack, senior corporate and tax lawyer at Devry Smith Frank LLP. You can reach him directly at 416-446-5818 or by email at frank.shostack@devrylaw.ca

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

     

    By Fauzan SiddiquiBlog, Corporate Law

    How a Mediator can get you out of an Impasse

    Mediators have to be adept in soft skills to identify and break down the causes of an impasse between opposing sides. DSF lawyer and mediator Eric Gossin shares his wisdom and experience on the tricky task of bridging often seemingly insurmountable differences.

    Grasping underlying issues

    Disputes are often multilayered, and it takes a skilled mediator to peel them back and understand what’s at the core. A superior mediator has the skill to read between the lines and intuitively understand what the issues are that are not spoken about. For example, in an estate matter between siblings, the background of their relationship needs to be taken into consideration. At times it may be necessary to address the personal issue that the father has always favoured one sibling over the other and the hurt feelings this caused in order to be able to get to a compromise regarding the legal issue.

    The mediator moves away from the money and property issues, in an attempt to get one party to understand what is bothering the other side. The goal is to get the parties to acknowledge the other side’s real interests.

    Getting parties to talk

    In order to reveal underlying issues, the mediator needs to get the parties to talk, which is not always an easy endeavour. One strategy is to focus on things the parties have in common. Another is to convey to them that the other side is giving conciliatory signals. Such commonalities and signals are usually overlooked by parties who are in rigorous dispute. In order to make them see these signals and common interests, it takes lots of restating and reframing of positions by the mediator.

    Another strategy is directing the parties to areas where something positive can be accomplished, even if it is small at first. Small victories will help them move to a position that can break the impasse on a larger matter.

    If parties are immovable and none of the above bear’s fruit, it is a good idea to carefully point out respective weaknesses in the parties’ cases. This will showcase that litigation, the alternative to mediation, and the route that the case will often take if mediation fails comes with risks. A judge’s decision may well be one where neither side is getting what they want. It is only in rare cases that one party gets all they want. Compromises are the rule. Realizing this will often keep the parties at the table and make them more flexible so that a stalemate position is avoided, which is the first step to a settlement.

    Sometimes a mediator will invite third parties into the mediation — such as a shareholder, a spouse, or business partner — if he thinks that will help move the matter forward.

    The relation between mediators and lawyers

    In my observation, it is common for lawyers to take the position that they have made their final and best offer, or to pronounce a stalemate. A mediator then has to walk a fine line, careful not to undermine the legal advice of the parties’ lawyers.

    Each lawyer has the obligation to put forth and defend their client’s case, but sometimes seeing what is in the client’s best interests is not always cut and dried. Lawyers may not always dig deep enough to reveal the underlying issues that stand in the way of a settlement.

    The situation can become difficult for a mediator when he or she realizes the impasse is because of counsel. Sometimes a mediator can sense that if it wasn’t for counsel, the client would be prepared to move. Sometimes the reverse happens where the clients are stuck, and the lawyers are encouraging them to settlement.

    That dynamic is a great challenge in mediation, and one of the things that separate the average mediator from a better one is their ability to recognize that tension between the lawyer’s legal position and the client’s — and whether one or the other is more enthusiastic in settling.

    Admittedly, sometimes people just want to fight. Mediation cannot solve every case, however, in most cases, it is successful.

     

    “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”

     

    By Fauzan SiddiquiBlog, Mediation