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How to Resolve Shareholder Disputes

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The occurrences of shareholder or boardroom disagreements are common in many companies and organisations. Even when organisations are formed by close family members or friends, it is important to anticipate disputes and to create a proper dispute resolution mechanism beforehand. One would wonder though, why would disputes occur in a properly constituted company?

Common Causes of Shareholder Disputes

There are many reasons why shareholders in a company disagree. The most common causes include:

  • Poor personal relationships between shareholders or directors
  • Disagreements over the future direction of a company
  • Conflict of interest; especially common with company directors
  • Complaints of underperformance among shareholders or with directors
  • Concern that the board is not meeting its legal responsibilities
  • Disputes over the use of company finances, especially when shareholders are complaining over non-payment of dividends.
  • Disagreements over the issues of share transfer and pricing.

These are just some of the more common causes, although they may also vary depending on the make-up of each company’s shareholding.

Catering For and Anticipating Disputes

Anticipating for and creating a dispute resolution mechanism among shareholders of a company is the best way to solve disagreements among shareholders. This can save the parties involved a great deal of time, money, and emotional strain during the resolution phase. The best way to do this is to have an agreement between shareholders.

In Singapore, companies and joint ventures frequently use shareholders’ agreements to regulate the rights and obligations of each shareholder. However, when the shareholders’ agreement is lacking, the Articles of Association may then serve the same purpose.

The shareholders’ agreements are essentially a contract entered into by the shareholders of an organisation, under the ambit of Singapore’s contract law. Subject to certain exceptions, the laws of Singapore do not generally specify the exact scope or the limit of these agreements.

Before it was repealed, even the then- optional template of Articles of Association prescribed under the Fourth Schedule of the Companies Act did not necessarily limit the extent of the agreements among shareholders.

In turn, these mean that shareholders’ agreements have all along been extremely valuable tools towards dispute resolution. This is still the case today.

Since shareholders’ disputes are often related to the actions of the directors, the agreements may also dictate the composition of the board of directors. However, on matters relating to the director’s responsibilities, their voting rights and all other powers are mostly dictated by the provisions of the Common Law in Singapore and by the Companies Act.

When Disagreements Do Occur

In most companies, the shareholders’ agreements provide for arbitration when disputes arise. The most common reason for this is to bring in someone who is neutral but well-versed in the issues under dispute. Under the laws of Singapore, the shareholders are free to determine where such arbitration will be conducted, including overseas.

Since arbitration is a consensual arrangement between shareholders, it is very important for them to pay close attention to the wording of the arbitration clause. Failure to word it properly may easily escalate disputes by virtue of parties’ divergent contractual interpretations.

It is also important to note that there are certain matters which are non-abatable. These include issues which are clearly provided for in local and international laws.

For example, under s 216 of the Companies Act, a minority shareholder may apply to the Court to bring an action against the company’s directors or majority shareholders when the exercise of the directors’ powers or the conduct of the company’s affairs are oppressive to him or her. This is usually coupled with the fact that the wrongdoers do not rectify the situation precisely because they control the company in essence.

In such a case, the law is superior to the Articles of Association or the shareholders’ agreement.

Other examples of matters which are directly governed by the law include:

  • Marriage and divorce
  • Criminal law
  • Patents and trademarks
  • Probate and estate (i.e. inheritance issues)
  • Insolvency (both personal and corporate)

In the above issues, the law of the land has specific provisions which override the jurisdiction of any shareholders’ agreement or the provisions of any Articles of Association.

How can an Individual Shareholder Enforce his or her Rights?

Besides the provisions of dispute resolution set out in the shareholders’ agreement or in the Articles of Association, there are other avenues through which individual shareholders may enforce their personal rights. These include:

  • Requesting a deliberation of the matter during a general meeting.
  • Requesting legal intervention by the authorities for criminal acts such as criminal breach of trust.
  • Requesting the company directors to take action against a wrongdoer pursuant to certain provisions of the Companies Act.
  • Suing the wrongdoers in court as earlier mentioned.

In conclusion, the best way to resolve disputes is to provide for their resolution even before they occur.