How to Manage Shareholder Disputes During Mergers and Acquisitions

Shareholder disputes happen, and they can be especially complex when navigating the mergers and acquisitions (M&A) process. Sure, shareholders can benefit from M&A, as they may enjoy growth opportunities, increased share prices, and higher dividends. 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. For example, there are often legal costs associated with these disputes. 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 when a deal is valued over $100 million, 93% were challenged, with an average of 4.8 lawsuits filed per deal. [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. Being proactive and planning ahead can help you effectively manage any 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. Including provisions in an operating agreement that clearly delineate the rights and obligations of the parties in a merger or acquisition during the formation of the company can help manage future disputes.
If there is no operating agreement in place at the time of an merger or acquisition, be sure to address any issues in the letter of intent. Before committing to the deal, the terms of the agreement and conditions surrounding the transaction should be discussed. 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. An alternative solution is to consider changing the category of the dissatisfied shareholder’s shares, making them a sleeping partner if they are 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. Get the ball rolling to see what potential options are on the table. 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. If a dispute is inevitable, invite the shareholders to express their concerns before an independent third party. 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, the ramifications of the dispute, and possible legal concerns is paramount. Involving a corporate attorney will be critical, especially if shareholder pushback is significant.
Mediation: Resolving shareholder disputes via mediation can avoid litigation. Again, this involves an unbiased third party who can potentially guide parties toward a resolution. The idea is to open communication so disputing parties 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. A decision will be made in a court of law, which is often time-consuming and public.

No one path is the “right” solution, as each scenario is unique. 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. Getting advice from a lawyer before making any agreements final is crucial, even if you are not progressing with the litigation process.

If you are unsure how to proceed during any M&A phase or how certain decisions will impact business outcomes, speak with a professional attorney. The Campbell Law Group offers business, commercial, and employment law services.

Sources

[1] Shareholder Litigation Involving Mergers and Acquisitions