How to resolve partner and shareholder disputes

Questions to ask early to avoid disputes later

Mark Baerg provides a series of questions for entrepreneurs to consider when they are forming their company. Part of what he calls the “business prenup,” they can help ensure founders are in agreement about where the venture is going and how a partner might exit.

• What does this venture mean to each of you?
• What is the nature of the business and the opportunity that you see?
• What do you expect to put into this business?
• What do you bring to the table?
• What do you expect to get out of it?
• How will you be compensated?
• How can somebody be bought out if they want to leave the company?
• What method will be used to decide on the value of your ownership stake?

How can you avoid messy disputes?

In his previous role, Baerg led over 800 mediations in nine years, assisting parties involved in lawsuits to try to resolve them at an early stage. He said he often saw people who had been unprepared for conflict.

“The people who were in business disputes that had become lawsuits were often those who hadn’t thought about contingencies,” he says.

Baerg says that as a company partner or major shareholder, you have to look ahead at things like the dissolution of your partnership.

“You have to think, ‘if we’re going to break up, on what terms and in what ways do we break up?’”

He says preparing for a business breakup, for example, could mean planning how partners would determine the value of their shares in the event of a future dispute. For example, partners could start by providing their own value and seeking agreement and, should that fail, using a pre-selected business valuator and method of valuation.

When does your business need a mediator?

While many think of mediation as a tool when partners are feuding, Stitt sees it as a place where you can discuss complexities. “Instead of calling it mediation, think of it as negotiation. You’re negotiating with each other through all stages of business.”

He says mediation can be used for things like rethinking strategic direction or deciding how weakened earnings will affect reinvestment and shareholder profits. As for smaller businesses, he has seen mediation settle disputes about how much each party contributes to the business.

Baerg says preparation is a key part of mediation.

“Develop an agenda for what you want to discuss. What are the issues that each side sees, and what are the concerns? What are you not happy with? Get clear on your own hopes and expectations, what you’d like to see from the mediation.”

What happens in mediation?

Baerg sees mediation as a tool to bring two people into a room who might have been thinking that their dispute was headed to court: “Sometimes, you can sit down and talk about what’s most important, then see if you can find a way to meet each party’s interests.”

Stitt, who has heard his fair share of raised voices, says that just because mediation can get heated doesn’t mean things are getting worse.

“You can have hours of venting. It can feel like a complete disaster, but that’s what the parties might have needed—to go past the release to reach a solution. Perhaps they never had an opportunity to express their concerns. This is their opportunity.”

As for ground rules, Stitt lets the parties take the lead “Many mediations have the parties agree that they want to have one person speak at a time. But I’ve had mediations where the parties have said, ‘That’s definitely not what we want. We want to be able to interact and interject. And if the person says something I don’t agree with, I want to be able to jump in.’”

Baerg recommends clarifying some legal protections for the conversation.

“I set some parameters for the discussion, such as that it's ‘without prejudice,’ meaning that nothing that’s said in the meeting can be quoted or used as evidence in litigation. That allows you to have an open conversation, to explore possibilities, without having those discussions used against you later.”

What is the mediator’s role?

“The mediator’s job isn’t to tell the parties what to do. The mediator's job is to facilitate the negotiation,” says Stitt, who outlines several tasks for a mediator:

• facilitate the discussion and have the negotiation run effectively
• bring out the issues that need to be discussed
• figure out how to get at the underlying interests behind the positions
• make sure that the parties feel their concerns have been heard
• help parties figure out ways to come up with creative solutions
• bring up issues they may not have thought of

Examples of successful mediation

The mediation process can be fraught with challenges. In this edited excerpt from his book, Mediating Commercial Disputes, Allan J. Stitt shows that while a dispute can involve complex negotiations, it can also bring about unexpectedly positive moments.

Revisit your agreements

Baerg says being in business means readjusting your plans, and perhaps your relationships.

“The best-made plans for any business will inevitably be reshaped by the constraints of reality,” he says, adding that you need to periodically sit down and look at how your company or its environment may have changed.

“How has your vision been reshaped by feedback from the market or your potential customers? Things also change in people’s personal lives. They might get married. What does their spouse think of how much they’re working at this startup? They might have kids along the way. How do they feel about the amount of time spent with them?”

Or perhaps all signs point to a partner who needs to exit the business.

5 tips to keep your company disputes out of court

Mark Baerg offers advice on how SME partners and shareholders can keep disagreements from becoming litigious. 

1. At the outset, get clear about the direction and purpose of the business and each partner’s contribution and compensation.
2. Use unanimous shareholder agreements and other contractual provisions like a “business prenup” to determine how partners will split in the event they can’t reconcile their differences.
3. Build dispute resolution mechanisms into your agreements, like a shotgun clause or pendulum arbitration, to incentivize reasonable offers.
4. Communicate and revisit agreements to adapt to changing personal and business realities.
5. Consider hiring a corporate lawyer to handle structuring or restructuring of the business to create certainty and prevent disputes before they arise or escalate.

"You can then ask, ‘How do we make a clean exit so that you can move on to something that works better for you?’”

Next step

Discover the basic concepts of corporate governance and the importance of assembling a board of directors in our free guide, The Science and Art of Good Corporate Governance.