BY JACOB MUTEVEDZI
Cordial relations with business partners will not continue ad infinitum. At the best of times, it is not uncommon to find even the closest business associates with daggers drawn, ready to engage in life and death corporate duels. When the good times are rolling and consensus reigns supreme in the boardroom, it is difficult to imagine being locked in mortal combat with your fellow shareholders. The likelihood of hostilities is too ghastly to contemplate. However, repulsive as it may seem, conflict is an inevitable consequence of concerted commercial ventures.
As a result, it is wise to make provision for dispute resolution mechanisms. Ordinarily, such dispute resolution methods are encapsulated in a shareholders’ agreement. A shareholders’ agreement is an agreement concluded between all or some of the shareholders of a company. It governs the relationship between the shareholders, corporate management, ownership of the shares and the protection of the shareholders.
A shareholders’ agreement is, in many respects, not dissimilar from a pre-nuptial contract. Conflict management mechanisms should be embedded in your shareholders’ agreement from the get go. Dispute resolution clauses minimize disputes and usually prevent them altogether. Failure to have good dispute resolution mechanisms in place almost always turns out to be costly. It is better to brief a decent commercial lawyer to draft a solid shareholders’ agreement than to spend a fortune on future litigation.
It is important to make sure that your shareholders’ agreement is drafted by a competent business lawyer. In the majority of cases, shareholder disputes boil down to a difference of interpretation, amongst the various parties involved, of the provisions of the applicable shareholders’ agreement. Ambivalent and vague provisions spawn conflict. Therefore, the most efficient way to prevent potential disputes is to draft clear and unambiguous shareholders’ agreements.
By forecasting all the possible scenarios where shareholders will need to make decisions and making provision for how those decisions should be reached, good shareholders’ agreements will minimize the likelihood of future disputes. This will save shareholders time, legal costs and unnecessary strife.
Arbitration is highly recommended as an extremely efficient and effective way of settling intra-company disputes. This is why “arbitration clauses” are a staple in shareholders’ agreements. An arbitration clause is a contractual provision which stipulates that any dispute must be resolved by way of arbitration.
An arbitration clause in the shareholders’ agreement is binding on the parties privy to the shareholders agreement. Creditors, employees and other contractors of the company are not privy to the shareholders’ agreement; therefore, they cannot invoke its provisions. For instance, employees cannot insist on resolving their disputes with a corporate employer through an arbitration clause in a shareholders’ agreement.
Nonetheless, a very difficult question presents itself. Shareholder disputes may arise and result in allegations of oppressive conduct or unfairly prejudicial conduct on the part of one shareholder against the interests of other shareholders. If a shareholder dispute which falls within the purview of the arbitration clause in a shareholders’ agreement arises, can the aggrieved shareholder seek relief from an arbitrator pursuant to the statutory oppression remedy provisions in the Companies and Other Business Entities Act [Chapter 24:31] (“the Act”)? Does an arbitrator have the power to grant such relief?
The arbitrability of shareholder disputes is a critical question for companies that have incorporated a mandatory arbitration clause in their shareholders’ agreement. “Arbitrability” refers to the notion of whether a dispute is capable of being resolved by arbitration. For instance, section 4 of the Arbitration Act [Chapter 7:15] enumerates matters that are not “arbitrable” which matters include, for example, matrimonial disputes (except with leave of the court), criminal matters and matters affecting the interests of minors.
Section 4 (3) of the Arbitration Act [Chapter 7:15] states that the fact that an enactment confers jurisdiction on a court or other tribunal to determine any matter shall not, on that ground alone, be construed as preventing the matter from being determined by arbitration. This suggests that shareholder disputes that fall within the jurisdiction of the court in terms of section 62 of the Act, for instance, are capable of resolution by arbitration. Nonetheless, the vexed question that remains is whether or not an arbitrator can grant the statutory relief provided in the Act. I am not aware of any case in which our courts have addressed this question.
In England, however, the position seems to be settled. In the case of Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855 the Court of Appeal decided that disputes emanating from shareholder agreements can be referred to arbitration even though there is a statutory remedy for minority shareholder oppression in the Companies Act 2006. The Court of Appeal confirmed that there is no express or implied requirement in the UK Companies Act 2006 section 994 prohibiting the resolution by arbitration of disputes arising out of an unfair prejudice petition, and that public policy does not exclude arbitration as a means for resolving intra-company dispute in an unfair prejudice petition.
The Australian courts, not to be outdone, have adopted a similar position. In Re Infinite Plus Pty Ltd [2017] NSWSC 470, the New South Wales Supreme Court held that it will enforce arbitration agreements, even where the dispute includes elements of company law and the remedies sought by the parties may not be within the power of the arbitrator to grant. In Hong Kong the position is no different as demonstrated in the case of Quicksilver Greater China Ltd [2014] HKEC 1241.
Such a pro-arbitration attitude is commendable and our own courts would do well to follow suit. Not doing so will, in essence, render arbitration a toothless bulldog in the resolution of intra-company disputes. Arbitration is an efficient and effective method of resolving shareholder disputes. Sometimes court proceedings are long drawn-out; therefore, going to court may not be the most efficient dispute settlement method when conflict is literally razing your business to the ground.
- Jacob Mutevedzi is a commercial lawyer and partner at Clairwood Chambers Attorneys and writes in his personal capacity. He can be contacted at +263775987784 or at jmutevedzi@gmail.com