How to Handle Shareholder Disputes during Mergers and Acquisitions
Shareholder conflicts are common, and can be particularly complex when dealing with mergers and acquisitions. These potential benefits are not without risk. However, these potential perks are not without risks.
When two companies integrate, there can be significant cultural differences, disruptions to operations, and regulatory challenges — none of which are to be taken lightly.
As a business owner, addressing these disputes as soon as they occur will ensure a smooth transaction and help lower future risks.
Causes and consequences of shareholder disputes during M&As
During the M&A process, there are many potential causes for shareholder disputes, including disagreements over:
- Valuation
- Control
- Financial discrepancies
These disputes can create a ripple effect, financially burdening those involved. These disputes can often be accompanied by legal costs. However, the most significant monetary blow often arises out of the disruptions at the board level caused by these disputes, which can harm a company’s performance, reputation, and management capabilities.
Common reasons for shareholder disputes in M&As
It’s important to note that you’re not alone if you’re facing a potential shareholder dispute related to an M&A deal. Stanford reported that 93% of deals valued above $100 million were challenged. On average, 4.8 lawsuits per deal were filed. [1]
Here are some of the most common reasons for shareholder disputes:
- Valuation disagreements: Disputes over the worth of the company or shares.
- Differing business strategies: Disputes over which vision should lead the company’s future.
- Minority shareholder rights: Disputes over minority shareholders feeling their rights are overlooked.
- Miscommunication or lack of transparency: Disputes over misinformation can lead to conflict.
Preventive measures to reduce the impact of shareholder disputes
Once a merger is announced, it’s not uncommon for issues to arise relatively quickly. Planning ahead and being proactive can help you manage potential disputes. Consider these tips when preparing for a merger or acquisition:
- It is best to contemplate what issues might arise during a merger or acquisition prior to reaching that stage of your business. Include provisions in an operating contract that clearly define the rights and responsibilities of the parties involved in a merger or an acquisition during the formation phase of the company to help manage future disputes. Before committing to a deal, it is important to discuss the terms and conditions of the agreement. Discuss clear boundaries and, if possible, formalize a corporate resolution/agreement so no shareholder can hold the deal hostage during negotiations.
- If a dissatisfied shareholder is willing to sell their shares, see if an avenue exists to buy out the dissatisfied shareholder. Consider changing the category of a dissatisfied shareholders shares to make them a sleeping partners if they’re interested. Communication will remain imperative throughout this process, ensuring any changes are legally sound.
- Involve all shareholders, holding a meeting where everyone can vote on issues relevant to the dispute. Start the process to determine what options are available. When you have this level of information, you can plan accordingly, pinpointing the most pressing issues and who is spearheading the conversation.
- Bring in a neutral party for the valuation. Invite the shareholders to voice their concerns in front of an independent third-party if a dispute is inevitable. This step allows them to try to resolve the disputed issues while avoiding formal litigation.
- Effective dispute resolutions
Negotiation: Proactive involvement in negotiating terms before issues arise is ideal but not always possible. Understanding the corporate structure and the legal implications of the dispute is crucial. Involving a corporate attorney will be critical, especially if shareholder pushback is significant.
- Mediation: Resolving shareholder disputes via mediation can avoid litigation. This is another instance where a neutral third party can guide the parties to a resolution. The goal is to encourage communication between disputing parties so they can negotiate constructively. Problem-solving and a more adaptable framework make this option less rigid than a legal proceeding.
- Arbitration: The next step would be arbitration, a private process typically faster than litigation. One or more individuals will be presented with evidence and arguments before making a final decision.
- Legal action: Legal action may be required if you disagree with the suggestions above. Each scenario is different, so there is no “right” way to resolve the dispute. The right method will depend on the dispute, the parties involved, and the desired outcome.
- How to manage disputes post-merger
In the event of a post-M&A dispute, there are some steps you should take, including the following:
Ongoing communication/transparency, maintaining efforts to settle through negotiations outside of court.
Evaluating performance, seeing how these disputes impact current staff and management capacities.
- Adjusting agreements as needed ensures you consider your decisions’ near – and potential long – term effects. Even if you do not intend to pursue litigation, it is important to consult a lawyer prior making any final agreements. The Campbell Law Group offers business, commercial, and employment law services.
- Contact us today for more information on how we can assist your business.
- Sources
Shareholder Litigation Involving Mergers and Acquisitions
