5 tips for resolving disputes with business partners before they escalate

Disputes between business partners can be like marital disputes especially when the relationship that held a business together is tearing it apart. When you are talking about shareholders, partners or fellow directors the arguments can differ but fundamental questions like “What needs to change for us to stay together?” or “Who should leave and on what basis?” can also be similar. Personal decisions can be inextricably linked to what’s best for the family except that here ‘the family’ is the business – unless it is a family business, in which case there are probably two families to consider.

Getting even may feel tempting but how do you go about getting what you want?

1 Step back. Look at the big picture. Before you do anything, think. What do you want? What’s best for the business? Investigate your options and, in each case, the best way of achieving your objective.

2 Check your agreements and get advice. Find out where you stand. Review the Shareholder Agreement, the Articles of Association and any other agreements that you agreed back at the ‘pre-nup’ stage. What do the termination and deadlock provisions say? Do they offer you the best way of separating successfully? Or have things moved on since then?

3 Reality test your options. In each case, be sure to understand where you are likely to end up and what the risks, costs and tax consequences are. For you and your business. Who controls the board and the shareholder meetings? How are employees, clients, financiers, creditors, debtors and competitors likely to react when word gets out? What contingency plans should you make? Tell your top team what is happening. You want them to feel included. They probably know anyway.

In a family business there can be added complications to consider, particularly where continuing shareholders and family members not involved in running the business have differing needs and interests.

Then – and this can be a difficult one – think carefully about who can best take the business forward.

4 Decide on your game plan. Are you going to be better off litigating, negotiating or mediating? Analyse what each is likely to achieve or jeopardise.

a) If you want to negotiate, consider hiring a mediator. The chances of successfully settling a dispute are that much higher. 70 per cent of UK commercial mediations settle on the day. Introducing an independent mediator invariably changes the dynamics and gets people focused on settling. The process is confidential.

It should become clear during the mediation whether the relationship is salvageable or not. If it isn’t, use the mediation to work out the best way of divorcing safely and inexpensively without destroying the business.

At some stage you are likely to end up mediating. ‘When’ is mainly a question of timing. If people seem ready to talk, the earlier you do so the greater the likely savings in legal costs and management time. If not, wait for a window of opportunity but don’t leave it too late. Also, carefully consider any invitation to mediate and reply promptly if you don’t want a court to impose a hefty ‘costs sanction’ on you later.

b) If you want to litigate, first find out:

- What the effect on you and the business is likely to be, win or lose. People often have multiple hats, e.g. as shareholder, director and employee. Be sure you know where you stand in each scenario.

- If you win, can a court give you what you want? For instance, would winding up the business, removing a director or forcing a share purchase work for you? Judges rule on points of law. They don’t offer businesses relationship solutions. A judge can sanction the appointment of an independent valuer to give a binding valuation (assuming that’s a risk you want to take) but don’t expect a judge to get involved in the actual valuation. Also, getting and agreeing an independent valuation can be harder in the aftermath of a bitterly contested litigation.

- What are your chances of winning? A ‘strong’ case usually means just means 60-65 per cent. Get cost estimates through to end of trial. Calculate how much you should net, win or lose.

- How long could getting a binding court decision take? Think about how you and the business will be affected in the meantime. It can get messy and protracted.

- Now, repeat the exercise for everyone else.

5 Don’t let it fester. Tackle it head on. Face to face. Arrange to meet away from the office. Give yourselves plenty of time and block out diaries to avoid distractions. Agree who should attend. Keep numbers to a minimum. Include anyone who needs to be part of a settlement. Consider whether advisors should attend and whether a mediator could make it more productive.

Next week, how to come away from a meeting getting what you want.