At Aptum, we spend a lot of time helping clients effectively resolve shareholder disputes. It’s frustrating to watch how these disputes can quickly become embroiled in what essentially starts to resemble a family law dispute.
While it’s always some grievance that triggers a shareholder dispute, effectively resolving the dispute is about two things – outcome and value: who will buy, who will sell and at what price?
In our experience, parties and lawyers often get caught up in spending considerable time and resources in agitating and proving the grievance (the oppression) and have real difficulty seeing beyond the oppression. Oppression is rarely the real issue to resolve. Once the parties accept that oppression has been established, the focus must be on value – if there is no value in the company, a party won’t get anything for their shares in the company, irrespective of the oppression.
The focus on value reflects the courts’ approach. It’s no secret that judges loathe oppression trials, so they will do what they can to direct the parties to focus on value. The real questions for the parties and the court to address are:
1. What is the value of the shares (and how is the value determined); and
2. How can the parties best achieve the exit?
Value
While there are many forms of relief that the Court has the power to grant, in practice, one or both of the parties will seek orders for a compulsory buy-out of shares in order to achieve a clean exit with the only issues to be decided being the value of the shares and which party will be the buyer (although it is typically the majority shareholder who is more readily suited to being the buyer).
The message here is: focus first on value.
Identifying the appropriate value for a party’s shares can be a complex task, and there is no prescribed methodology for undertaking a valuation (and indeed the appropriate methodology will change depending on the nature of company and even the tendency of a particular expert valuer).
Ordinarily, the court will appoint an expert to value the shares, with the trend being to appoint a single expert. Where an expert is appointed, the critical focus must be on ensuring that the expert has all relevant information to carry out the valuation exercise. It’s important to identify and ensure that the materials are available before the expert undertakes the valuation exercise.
Critically, the oppression does not drive the price that will be paid. The price a party is required to pay for the shares will only be affected by the oppression where the oppression itself has had some material impact on the value of the company or its assets. This, in our experience, is often the biggest area of confusion. The oppression itself won’t affect the outcome unless it has had a direct impact on the value. It’s therefore important to ask first, what is the value, and then turn separately to the question of whether the value has been affected by the oppression. If an underlying asset is hypothetically worthless, then so too will be the value of the seller’s shares in the company.
Exit – who’s to buy out whom?
While the court has an armoury of remedies available to solve a dispute, the remedy for shareholder disputes will invariably come down to two options – a shareholder will exit by selling its interest to another shareholder, or the company will be wound up.
While there is surprisingly little authority about how a court would determine a dispute where both parties are wanting to be buyers, ordinarily, the majority holder will buy out the minority holder. In circumstances where shareholders are equal, it is more likely to follow that the party responsible for the oppression will buy out the shareholder who has been oppressed. This satisfies the objective of allowing release of the oppressed party from the company and recognises that an order providing for a minority to acquire the shares of a majority is extraordinary and virtually unprecedented.
It’s always open to the court to simply wind-up the company. Given the consequences of a winding up, courts are generally reluctant to make such an order, particularly where the company is continuing to trade successfully. However, while a wind-up is unusual, for shareholders who get bogged down in pointless, long and costly battles that focus on airing grievances rather than focusing on outcome and value, a wind-up will begin to look like the court’s only viable option.
Aptum frequently helps clients resolve oppression disputes both for minority and majority shareholders. The critical message is: don’t allow a shareholders’ dispute to destroy value. Ask first whether the relationship can be repaired in a way that would allow the company to continue to function effectively, and then very quickly turn the attention and legal costs to outcome and value.
This article is written by Mia Basic and originally appeared on Linkedin.
