In my last blog, I offered some tips on working out how best to resolve a dispute with a business partner head on. So, once you have arranged to meet, how do you go about changing the dynamics between you so that you are more likely to have a productive conversation and come away from the meeting getting what you want?

1 Focus on your endgame and prepare for the meeting. 

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.  

Hope you find it useful.

Andrew

I recently wrote about why litigants often make irrational decisions and referred to Daniel Kahneman’s book ‘Thinking, fast and slow’. This week, I am going to concentrate on why people sometimes misunderstand the likelihood of winning. 

1 ‘Loss Aversion’ can have a disproportionate effect. We feel the pain of a loss much more than we feel the pleasure of a gain. According to Kahneman’s studies if you lose £10 today, even if you find some money tomorrow, you would need to find more than £20 to make up for that £10 loss. That may help explain why litigants will often prefer to risk incurring greater costs rather than accept the crystallisation of an existing loss. 

2. Flaws in comparing costs and losses: People react differently depending on whether a disadvantage is framed as a cost or a loss. Kahneman cites a study where people were offered the choice of a sure £50 loss and a 25% chance to lose £200. 80% of them went for the gamble. However, when the choice was re-framed as paying £50 for insurance against a 25% risk of losing £200, only 35% refused to pay for the cost of protection. 

3. ‘Not understanding the odds’. We typically overestimate these in cases involving a chain of events, i.e. where to win, each of a series of events must occur, like in a restraint of trade case for example. We forget that even if each event is very likely, if the number of so-called ‘compound’ events is quite large, the overall probability of success can still be low. Conversely, we underestimate so-called ‘disjunctive’ events, i.e. where a complex system will fail if any of its essential elements fail. The likelihood of an individual component failing may be slight but if many components are involved, the probability of failure can be surprisingly high. 

4 Our understanding can be distorted by bias. Like the ‘Present’ bias, which causes us to pay attention to what is happening now and not worry about the future. This may explain why we overeat or have unprotected sex, but also why litigants may escalate disputes in spite of warnings that things might not turn out the way they want.

Another bias that frequently comes into play when dealing with conflict is the ‘Negativity’ bias, the problem being that negative events are remembered much more than positive ones. So much so that it is reckoned that for every argument one has in a relationship, you need to have five positive memories to maintain an even keel – something that might also be worth bearing in mind when framing an apology.

In next week’s blog, I will explain why trying to understand who you are arguing with can be as productive as concentrating on the subject of the argument. 

Reading Daniel Kahneman’s book ‘Thinking, fast and slow’ I was struck by how often the Nobel Prize winner’s findings also resonate in a litigation context. Aside from any emotional or financial distortions, here are six things that can affect a litigant’s judgement.

1. ‘I’ve got a strong case’. Once they have been told this, litigants frequently cling to this notion instead of properly analysing what the real odds or financial ramifications are likely to be. Apparently, we become over reliant on how things are described to us, even when we are paying that person to be on our side. Predicting an outcome in terms of the favourability of a description is going to be insensitive to both the reliability of the evidence and the expected accuracy of any prediction.

2. The illusion of validity: We are often overconfident in our own predictions. That might explain why when mediators ask advisors what their client’s chances of winning are, the combined tally invariably exceeds 125%. Or why buyers and sellers may have the same information about a stock tip yet both believe that the current price is wrong and will be corrected in their favour.

3. Hindsight bias: Our overconfidence is fed by our illusory certainty of hindsight. Take the ‘I knew it all along’ effect. Our recollection of what we said or predicted at the time often gets subsequently distorted. If the event then occurs, we tend to exaggerate the probability that we had previously assigned to it. If it doesn’t, we erroneously recall that we always considered it to be unlikely.

4. Outcome bias. We tend to evaluate decisions by whether the outcome is good or bad, not by whether the process was sound.

5. Being blind to the obvious, and blind to our blindness. When we focus intensely on something, it can make us effectively blind. Here’s an example http://goo.gl/s6Nz but it can also apply to a litigant’s case.

6. Impure decision-making. We often make decisions based on our own beliefs and preferences, rather than logic. That is why, for example, an objective improvement can be even experienced as a loss, say where an employee receives a smaller rise than other people in the office. Similarly, our ability to make objective comparisons tends to be skewed by how easily we can recall similar instances, how recently they happened and the impact that they had.

Next time, I will explore why clients may misunderstand litigation risks and why we are much worse than we think at being able to understand someone else’s point of view.