Avoid conflicts between shareholders

A very large number of conflicts between shareholders arise from the simple fact that the entrepreneurs did not take the time, when their partnership was set up, to reflect on their values, each other’s expectations and the raison d’être of their company, as well as on how it should be managed. Sometimes, it is the development of the project itself and the management of emergencies that explain this lack of reflection. In other cases, it means that valuable ideas should be shared, which is not always easy to do with your (future) partner. In the majority of cases, the need to take time for this is simply not felt.

However, at some point, entrepreneurs will inevitably be faced with difficulties in managing their business (failure to meet targets, cash flow problems, uneven workloads, confusion/unclarity of roles, etc.) and these discussions – which should have been conducted right at the start – will have to be held in a less favourable and serene climate, which will inevitably complicate the conversations.

It is therefore essential to carry out a careful analysis before becoming involved in an entrepreneurial project in order to maximise the chances of success.

When incorporating your company, certain people outside the company will play a key role: the accountant, the lawyer/legal adviser, an adviser/mentor with specific expertise or experience useful to the company, etc.

It is vital to choose these people for their expertise and independence rather than because of their closeness to a particular shareholder (“friend of” or “uncle of”). If these people are truly independent, they will be able to help entrepreneurs run their business and, sometimes, manage crisis situations. In this sense, a high-quality entourage is a conflict prevention tool.

Otherwise, there is a risk that these people, at some point, will step outside their independence duty and choose sides. Not in the company’s interest (which should always be the case), but for one of the shareholders/directors, and this for a series of bad reasons:

• They are members of the same family.
• Because of loyalty to a long-standing acquaintance/friend.
• It creates the possibility of developing a longer-term business relationship with one of the partners.
• …

In small and medium-sized companies, we often find that, in internal relations between members of management, directors and shareholders, the use of written documents is not necessarily the norm: absence of minutes of the general meeting or of the administrative body, absence of a shareholders’ agreement, absence of a service agreement for members of management, and so on.

There is often the mistaken belief that when everything is going well and everyone is in agreement, there is no need for a written document. But the opposite should be the case: without a written document, if a conflict arises, it will be much more complicated to defend a position even if there is no doubt that it is in line with reality.

In this sense, the use of written documents is a conflict prevention tool insofar as it enables decisions that have been taken in tempore non suspecto to be formalised and, consequently, avoids discussions after the event that could lead to the outbreak of a disagreement.

In small and medium-sized companies, it is not uncommon for the roles of shareholder, director and member of the management team to overlap and be exercised by a small number of people. In certain circumstances, this “entre-soi” can lead to conflict: this is the case, for example, when active shareholders systematically disagree about the company’s strategy. It is not uncommon for a conflict within the board of directors or the management to also generate difficulties at the level of the company’s shareholders (and vice versa).

In this case, it is useful to have an external person within the company who can respond to this problem: the independent director.

The independent director must have expertise or experience that is useful to the company, so that he or she can give an external opinion when important decisions are being taken. In some shareholders’ agreements, a special role is assigned to the independent director; in the event of a deadlock in decision-making due, for example, to opposition between directors/shareholders, the independent director could be given the role of settling the matter by taking a decision that he or she considers to be in the best interests of the company.

The appointment of independent directors is therefore a tool for preventing conflicts between shareholders, insofar as it makes it possible to overcome this “entre-soi” and potential blockages that are not necessarily based on objective criteria.

Lastly, it is essential to draw up a shareholders’ agreement at the start of the business relationship that is not a simple model, but is “tailor-made” for the needs of the parties involved and the company.

If it is to be effective, the shareholders’ agreement must reflect in legal terms the thoughts and discussions that have taken place at the beginning of the process with all the shareholders, and not the other way round. The reflection process involved in drafting the agreement will itself be a tool for preventing conflicts.

By setting out clear rules from the start, notably on the company’s strategic objectives, organisational and management principles, the roles and responsibilities of each party and the limits on power, the shareholders’ agreement will be an essential tool in preventing any disputes that may arise within a company.

Before deciding to set up a partnership, it is essential to take into account a number of crucial factors that will help you to ensure the success and endurance of your collaboration, and thus anticipate the many problems that are likely to arise.

Ultimately, transparency, communication and mutual trust are the key elements of a fruitful and lasting collaboration, ensuring the coexistence of shareholders who may have diverging interests.

But it’s essential to take the time to think things through, to lay the foundations for a successful entrepreneurial adventure.

Would you like to know more about how to avoid conflicts between shareholders and how deminor NXT can advise you in this respect? Please do not hesitate to contact Esphan De Greef.