Krzysztof Libiszewski: When there is a dispute between shareholders, the company always suffers
09.06.2011
corporate
Litigation Portal: You co-head the Corporate Law practice at Wardyński & Partners. The team mainly handles transactions in which the parties have a common economic goal they seek to achieve. But sometimes disputes may arise?
Krzysztof Libiszewski: Yes, of course. Most often disputes arise because the ownership structure developed to reflect the original investment structure remains unchanged. Over time, the shareholder structure may not keep pace with the growth of the company’s business, and as a result it may no longer reflect the true control over the company by its shareholders, or the impact that specific shareholders have on the company’s development.
These imbalances often give rise to conflicts between shareholders. Some may seek to retain a status quo that is beneficial for them, while others seek change.
Disputes may also be related to mixed ownership, where the company is controlled by a majority shareholder whose share in the capital is proportional to its contribution to the growth of the company, but there also minority shareholders who play only a passive role in the company. The interests between majority and minority shareholders may diverge far enough that conflict erupts.
For example, the majority shareholder may want the company to grow, and thus want the company to retain its earnings rather than pay them out as a dividend. At the same time, minority shareholders may not be as committed to participation in the company’s growth but only seek a quick return on their investment. Conflict could also arise if the majority shareholder wants the company to join a capital group it controls or participates in. Then the company may enter into various transactions designed to further the interests of the group as such, which may not offer any clear benefit from the perspective of the minority shareholders.
Then what? Negotiations, or straight into litigation?
As corporate lawyers handling shareholder disputes, we strongly urge the shareholders to work things out, but this approach does not come easily to every shareholder. When there is a dispute between shareholders, the company always suffers, because it prevents the company from developing as quickly as it could and generates opposing conceptions for the company’s future operations. In our practice we never encounter a dispute that does not have a negative impact in some way on the value of the company.
When a conflict develops among the shareholders, we always advise them to seek an amicable solution which will enable them to maintain the value of the company. When the shareholders are no longer able to work together, they can part pays in a manner that eliminates disputes and is economically beneficial for them.
But if they cannot reach agreement, often a legal conflict will arise, and one of the shareholders will typically try to pick apart the actions taken by the company authorities, in an attempt to show that they were somehow defective, or otherwise try to set aside corporate decisions. The company will then enter into a long period of close monitoring over the operations of the corporate authorities, accompanied by uncertainty surrounding whether decisions that have already been taken will remain in force.
How to defend oneself in a situation where a shareholder continually challenges decisions by the corporate authorities? Is it enough to follow procedures scrupulously, or for example charge the shareholder with acting to the detriment of the company?
There is no single recipe for every situation. Whenever we are presented with a case like this, we review the options available to the client. They will largely depend on whether it is a minority shareholder or a majority shareholder.
If it is a majority shareholder that has a problem with a minority shareholder or group of minority shareholders who are generating conflicts, it may be necessary to find a way to exclude the minority shareholders from the company or encourage them to exit the company voluntarily.
In the case of limited-liability companies, we may use the mechanism of exclusion of a shareholder, under which shareholders may be stripped of their rights as shareholders if they are de facto abusing their rights to the detriment of the company. In the case of joint-stock companies, there is a mechanism for “squeezing out” shareholders, i.e. a forced buyout of their shares.
If we represent a minority shareholder, we concentrate on determining whether the actions of the majority shareholder are lawful and undertaken in the best interests of the company. If not, in many cases such actions can be set aside.
The most invasive instrument available in the case of a shareholder dispute is a petition to dissolve the company, when it has become impossible for the company to achieve its purposes and the existing relations between the shareholders give no hope for any major improvement in the situation.
How long can that procedure take?
First I should point out that petitions to exclude a shareholder or dissolve a company are relatively rare in Poland, and rarely successful. The courts are very reluctant to use these tools, and treat them as a last resort.
By their nature, these claims are time-consuming, partly because civil procedure in Poland is still fairly complicated despite reforms introduced within the past decade. Added to this is the issue of collecting the proper evidence, including witness testimony and expert opinions. Because of the high hurdle for allowing such claims, it is crucial to present evidence to the court that justifies use of these instruments.
Gathering evidence and using it to confront the evidence presented by the other side is a long process. The possibility of appeals being filed must also be factored in. In consequence, the shareholder litigation we have assisted in has generally gone on for several years, and rarely ended positively for the company. We regard our work as successful if we are able to help bring the parties to agreement on the terms of an amicable parting of the ways, thus eliminating the parties’ co-ownership of the company.
Since disputes are time-consuming, costly and harmful to the company, how can we prevent them?
The most reasonable, simple and effective method is to set up the ownership structure so that the number of votes and the capital participation accurately reflect the real influence that each shareholder has on the company. It is also necessary to make a realistic assessment of the ability to cooperate and create a company with a simple ownership structure, and to include provisions in the articles of association and the accompanying shareholder agreements that make it possible to resolve deadlocks.
Many lawyers, at least those representing minority shareholders, have a tendency to try to include mechanisms in the articles of association or the shareholders’ agreement for blocking decisions within the company. They assume that the opportunity to block action by any of the shareholders in the company will force them to negotiate and compromise.
This theory often falls apart in practice, however. Articles of association or shareholder agreements providing for situations preventing decisions from being taken by the company’s authorities are an obvious source of conflict. They rarely translate into effective cooperation based on good will. Thus, as far as possible, we recommend that such mechanisms not be used, and if they are they should be balanced by mechanisms enabling one or the other of the shareholders to assume complete control over the company before the impasse goes on too long.
Thus the shareholders’ influence in the company should be properly reflected, the articles of association should avoid provisions that allow irreconcilable situations to arise, and the mutual economic interests related to the functioning of the company should be gauged rationally. The shareholders should not perceive the company as an area under their exclusive control, where they can abuse the rights they hold in violation of the interests of the other shareholders.
This is pretty general advice. The real task of the lawyer is to draw up the corporate documents in a way that balances the interests of the shareholders, prevents irreconcilable situations, and encourages rather than blocks cooperation between the shareholders. This approach to drafting requires experience and an understanding of the economic processes that will occur in the company in the future. Certainly there is no one simple recipe for going about it.
Interview conducted by Justyna Zandberg-Malec
