Corporate conflicts

Corporate conflicts

Often, what starts as an exciting adventure between two good friends ends up becoming a corporate conflict among founding partners. However, we should not only consider this scenario, but also situations such as that of a collaborator who joined the company with great promises but, due to different life circumstances, failed to achieve the expected results.

How to deal with corporate conflicts

Additionally, we must consider cases like that of an industrial partner who, unfortunately, did not fulfill their promises.When facing a corporate conflict, it is essential to consider the sector’s saying: “It’s easy to bring in a shareholder, but very difficult to get them out.” In this regard, there are three perspectives from which to approach these issues: prevention, negotiation, and judicial (or arbitration) resolution.

Prevention plays a key role in managing corporate conflicts. It involves adopting necessary measures to establish rules that can resolve the situation if a conflict arises, and which the parties involved theoretically accept as valid.

When considering bringing in a third party to our company for their value contribution, especially key employees, it is recommended to opt for an incentive plan that includes vesting and addresses breach scenarios.

In this post, we will refer to the shareholders’ agreement and clauses of the founders, the document par excellence that regulates the relationship between the partners and the company.

It is essential that the shareholders’ agreement from an investor’s perspective or any other member establishes the responsibilities, obligations, and commitments of each shareholder, such as their dedication regime or the prohibition to sell their shares within a certain period.

The consequences of non-compliance must also be detailed, including how the company, through the Shareholders’ Meeting, will verify such non-compliance and execute the foreseen penalty.

In many cases, it is more efficient to establish, as a consequence of serious and uncorrectable breaches by the partner, the obligation to sell their shares to the company at a punitive price, for example, 1 euro or the nominal value, which can then be acquired, usually by interested partners pro rata to their share capital. If there is no interest, the company could acquire them.

Having clear rules of the game can unlock complex situations, stemming not only from breaches but also from decision-making blockages. From the simplest case of decision-making among partners holding fifty percent of the share capital (we recommend avoiding this distribution) to decision-making blockages by majority systems both in the general meeting and the board of directors.

Clauses addressing these situations can prevent the company from being locked, which, depending on its severity, could lead to its dissolution. Let’s suppose that, despite the forecasts, a corporate conflict arises. In that case, the first step is always to try to reach a friendly solution in line with the mechanisms established by the partners.

If progress is not made after initial attempts, it is necessary to resort to professionals, whether lawyers or mediators. Corporate conflicts often have an underlying personal nature, so the intervention of an external third party can expedite negotiations. It may also be useful for the company’s management body, if not involved in the conflict, to attempt mediation.

If the situation cannot be resolved, then the means provided for in the shareholders’ agreement must be activated, especially in cases of non-compliance, which will be evaluated by the Shareholders’ Meeting through the voting of the partners, according to the established majorities.

Negotiation and judicial resolution to address corporate conflicts

We recommend starting with the negotiation phase, as although in certain circumstances, the exclusion of the partner may be defended from the moment it is agreed upon by the shareholders’ meeting, in many cases, a judicial procedure will be necessary, which could prolong for years, to force the sale of shares.

In the event of resorting to justice to enforce a decision of the Shareholders’ Meeting, some argue that if the shareholders’ agreement is recorded in a notarial protocol, the judge will validate it more than if it is a private document, since a notary has given authenticity to its content.

Therefore, the cornerstone of managing corporate conflicts is prevention and the adoption of mechanisms that allow for finding solutions to the controversy, especially through the shareholders’ agreement. Additionally, good negotiation can be crucial to prevent conflicts from escalating and resorting to judicial proceedings, which is the last option in conflicts among shareholders.