Shareholder dispute and exit solutions: from conflict to an orderly exit

The best way to avoid disputes begins long before the first conflict. The articles of association and a supplementary shareholders agreement, often called a syndicate agreement, set out how a shareholder can leave the company and what their stake is then worth. Whoever clarifies these questions while the relationship is still sound avoids having to negotiate them under the greatest pressure in a dispute.

Central building blocks are pre-emption rights and a right of first refusal. They secure the remaining shareholders access to the stake of a departing shareholder and prevent an unwanted third party from entering the company. In addition, put and call options govern the conditions under which a shareholder can tender their stake or the other side can acquire it. Our focus page on the shareholder dispute offers more depth.

A clear valuation and compensation rule is important. It determines the method by which the stake is valued and in which instalments the compensation is to be paid. An unambiguous method takes much of its explosiveness out of a later dispute. The concept of the shareholders agreement we explain in the glossary.

For an orderly exit several mechanisms are available that interlock. Drag-along obliges the co-shareholders to join in when the majority is sold, so that a buyer can acquire the whole company. Tag-along, conversely, protects the minority shareholder by allowing them to sell their package on the same terms. Both clauses are significant precisely with a view to a later sale.

For a deadlock, in which neither side holds a majority and important resolutions are blocked, there are dedicated clauses. In Russian roulette one shareholder offers the other their stake at a price at which the other must either buy or sell themselves. In a Texas shoot-out both sides submit a sealed bid and the highest bidder takes over. Such mechanisms resolve a deadlock without paralysing the company permanently.

These clauses must be carefully aligned with one another. An option without a clear trigger or a tender without a well-considered pricing can create more dispute than it prevents. How a share sale can be structured is shown in the post on the share deal and asset deal.

If the conflict cannot be resolved through the contractual mechanisms, the statutory routes remain. Under certain conditions a shareholder can exit the company for good cause, for example when remaining has become unreasonable for them. Conversely, a shareholder who grossly breaches their duties or harms the company can be excluded under strict conditions.

As a last resort there is the dissolution claim. It aims to dissolve the company when good cause exists and milder means are not sufficient. This route is drastic because it puts the very existence of the company in question. Courts therefore require that milder solutions have been seriously examined beforehand.

In practice, dispute resolution by mediation or an arbitral tribunal is often the better route. It is faster, more discreet and preserves the chance of an amicable solution more than a public court proceeding. A corresponding clause belongs in every well-made shareholders agreement.

Often at the end of a shareholder conflict stands not a standstill but a transaction. The exit of a shareholder, the entry of a new investor or the succession in a family business thus become the occasion for a share sale. Whoever thinks of the exit as an orderly sale process from the outset usually achieves a better result than someone who sees it only as a dispute.

In this case the tools of transaction practice apply. A clean valuation, a structured sale process and the preparation of one own documents strengthen the position of the departing shareholder. Anyone on the seller side will find further guidance in the post on vendor due diligence.

Here too an early assessment of the legal risks is worthwhile. An initial orientation is provided by our M&A transaction risk profile. The start of an orderly negotiation is described in the post on LOI and NDA.