Resolving conflicts between company shareholders or management board members 

Piotr Kłodziński|
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Does a fish rot from the head? It is a fact that in many companies there is a "war at the top". But if there are strong internal frictions and disputes in a company, its business and financial results usually suffer. For this reason, in this article, based on our experience, we present a model for managing this type of crisis. 

As part of our practice of supporting companies, their partners and management boards in resolving disputes, we usually assume that the more amicable the resolution of the dispute, the better. A classic "agreement" usually allows the parties to save a lot - primarily time and money, but also nerves and even years of their lives.

Getting out of conflict in 7 steps

When a dispute occurs in a company, where everyone should cooperate in order to achieve market and financial success, you should first of all act thoughtfully and keep your emotions in check for as long as possible. Below we present a diagram that should be a starting point for a responsible and prudent way out of the crisis. 

  1. Define the problem 

The first step, which saves a lot of time but is also an essential element of conflict resolution, is to clearly define what constitutes a "bone of contention". This is important because for individual parties to the dispute, something else may be the main source of misunderstanding. This step, no matter how obvious it may seem, cannot be skipped. Every process of resolving conflicts between company shareholders or management board members must begin here. It would be best to end the problem definition stage by writing down all misunderstandings. Of course, it is best if they are articulated by the participants of the "roundtable" meeting, but experienced lawyer may also hold several rounds with both sides to establish such a list of discrepancies. Then, it is crucial to make sure that everyone agrees on the subject matter and that the census largely exhausts their mutual grievances. The list of discrepancies created in this way is the best basis for the effective completion of the entire process. 

  1. Understand the interests of all parties 

Although in the broadly understood business world there is a belief that the most effective method of action is to pursue one's own interests at all costs, in this case this tactic does not lead to anything. It should be remembered that the partners or members of the management board "play on the same team" and it is in the interest of all of them to resolve any dispute that arises between them as quickly as possible. However, everyone has different points of view and wants to achieve different goals, so after defining the problems, the interests of the parties should also be clearly defined. Only in this way, in the next steps, will it be possible to develop satisfactory solutions that - in an optimal arrangement - will satisfy everyone. At this stage, it is best to avoid confrontations and focus on active listening. This will make it easier to understand the point of view of other parties in the conversation, which in turn may give rise to ideas on how to overcome the conflict. Here, too, it is worth using a pen and paper or a computer to write down clearly and transparently what each person is striving for.

  1. Create a list of potential solutions 

This is where brainstorming begins. It is best if each participant of the conciliation meeting presents the solution or solutions that he or she believes are the most reasonable. Of course, these solutions do not have to satisfy all parties, but when creating them, you should take into account not only your own interests. Any solution, if it is to "pass", must be partially compromised anyway. An idea that is completely unacceptable to someone may at the same time inspire another person or a mediator to create a compromise solution. At this point - as it happens during brainstorming - every vote is valuable. However, please remember that the ideas presented are not intended to pursue your own interests, but to create a database of solutions on the basis of which you will later be able to select the best ones. 

Later in the article, we describe in detail the individual solutions we propose. Of course, these are not all possible solutions to the situation. As noted above, at this stage only the ingenuity of the partners and the hired lawyer/mediator limits the possibility of reaching a compromise. Our practice shows that these outputs, and sometimes their "mixes", are most often used. These include: mediation, negotiations, purchase of one partner by another, creation of an external management board, strict separation of tasks, separation of part of the company, purchase by a third party or the worst solution, which is usually the dissolution of the company by the court. 

  1. Assess opportunities and set priorities

At this stage, you should realistically consider the prepared potential solutions and evaluate their advantages and disadvantages. This is not yet the moment for binding decisions, but rather for discussion, consideration of options by the parties and further analysis of what can be agreed to and what we want to further pursue. It is necessary to consider which proposed solutions are possible and which should be rejected at this stage. This is also where there is room for discussion and working together to find a way out of the situation.

The basis for the next step should be the assignment of priorities. Rarely (although it sometimes happens) a given solution meets all the needs of all participants in the dispute. However, indicating what is a priority for them - and even trying to dimension these priorities numerically, can help assess the adequacy of the solutions developed. It is also a moment that requires absolute honesty from all participants.

  1. Choosing the best options

The next step is to select from among the developed solutions the one that best suits the shareholders/management board. Of course, it does not have to be one solution - there may be several problems, so they will require more remedies. There may also be a situation in which choosing one of the developed options is not enough to resolve one dispute. For example, in the event of a large dispute between several partners, some will decide to sell their shares to an external entity, and some will direct their conflict to mediation. 

At this stage, the most important thing is flexibility, understanding and proper understanding of the previous points. It may turn out that the best solution to the situation will be to combine several proposed solutions, rather than choosing one of them. This is the art of compromise. 

  1. Formal decision making 

The importance of the principle of limited trust should be emphasized here. As is commonly known in business, it is worth relying on what is in the contract and not on oral arrangements. This situation is no different. It is therefore worth writing down and signing all decisions made - like a contract. Reaching an agreement between conflicting parties can often be difficult, so it is worth writing down such an agreement in case one of the partners changes their mind later. In such a situation, you will be able to rely on written provisions, the failure to comply with which will be sanctioned with appropriate penalties. 

Please remember that the decision made at this stage may be of various nature. On the one hand, it is possible to plan mediation or negotiations that will take place in the future. On the other hand, it is also possible to conclude a binding settlement or make final decisions, for example, the purchase of one of the partners by the other. If such a binding decision is made, which closes the dispute at this stage, the appropriate documents should be signed, in an appropriate form, preferably with the assistance of a professional business lawyer. Then the partners will have a guarantee that there will be no formal complications and the entire process will be carried out flawlessly.

  1. Implementation, implementation, monitoring 

In terms of implementing the decisions made in the previous steps, the key issue is what was written in the arrangements. Here - once again - the most important issues depend on the chosen methods of resolving the conflict, but some universal issues should be paid attention to. 

Any decisions whose implementation is postponed should be as secure as possible. This is about defining the process of implementing the provisions as broadly as possible. Preparing meeting dates, establishing a framework for activities, signing letters of intent, promises or preliminary contracts - these are all activities that must be taken into account when moving to the implementation stage. This is especially true of highly formalized solutions, i.e. those that require a more complex implementation process. These will include, for example, the purchase of one partner by another, the separation of part of the company, the purchase of shares by a third party or the dissolution of the company by the court. 

However, if the partners reach an agreement and introduce a new, clear division of duties or sign a different type of settlement, it is worth including such provisions in writing in a clear and transparent manner. In this aspect, professional help is essential, because the entire process resembles concluding a formal settlement, which requires appropriate knowledge, preparation and experience. 

Therefore, it is worth having all the processes described above supervised by an experienced lawyer who understands the realities of business, economic and commercial law and the "spirit" of a given company. Therefore, as part of legal services for companies, we provide services to resolve such disputes. We are able to comprehensively carry out the entire process described above, advise on the selection of the best solutions in a given case, and ensure their proper implementation - both from a formal and practical point of view. 

Specific ways to get out of the conflict 

  1. Mediation 

Mediation is a specific, amicable method of resolving disputes. It involves a third party - a qualified mediator - helping conflicting parties communicate with each other, define interests and issues for discussion, and reach a mutually acceptable consensus. It is a fully confidential, voluntary process and conducted according to certain assumptions, but at the same time in an informal manner and in accordance with the will of the parties. Importantly, the mediator is not an arbitrator. He doesn't judge, he doesn't evaluate, he doesn't dictate a verdict. It helps the parties reach an agreement and leaves it at the consensus stage. 

Within the model of resolving conflicts between partners in the company proposed above, mediation is possible at two moments. Firstly, mediation may cover the entire procedure, so a qualified mediator would help you go through all stages and finally draw up a settlement. The second option is to define their own positions and develop proposals for solutions by the parties, while at the same time there is an impasse regarding the final solution. Then the partners may decide that it is justified to refer the case to mediation. 

A qualified mediator will strive to resolve the dispute quickly, amicably and to the satisfaction of both parties. He will be able to direct the conversation between partners on the right track to bring it to a happy ending. 

Mediation, however, does not guarantee that the parties will "agree" and that potentially damaged relationships between partners will be magically repaired. If there are no prospects for this type of solution, the mediator and the parties may also work out a slightly more decisive solution - for example, the introduction of an external management board. 

As part of our legal services to companies, we also conduct mediations. We effectively help resolve disputes between partners, including in this way. Practice shows that if the parties want to resolve the dispute amicably and repair the relationship in order to continue cooperation, mediation is the best choice. 

  1. Negotiations 

This type of negotiation differs from the 7-stage model proposed above in that it is slightly more formalized. The conflicting parties prepare for negotiations, specific elements that need to be resolved are identified, and the entire process ends when all of them have been resolved. The parties often bring their professional representatives (lawyers) to the negotiations and the entire process of reaching a consensus is then very detailed and demanding. At the same time, negotiations - according to the model proposed by Harvard experts in their field, Roger Fisher and William Ury - should take into account: separating people from the problem, focusing on interests and not positions, searching for opportunities to achieve benefits for both parties and an emphasis on the use of objective criteria. A meeting on opposite sides of experienced negotiators who will understand the specificity of these particular talks should increase the chances of effectively resolving the dispute. 

As can be seen from the above, negotiations are a more complicated formula than the 7-step model presented above, so one and the other cannot be equated. Negotiations should be used when the "simplified" method of resolving a dispute fails.

We have extensive experience in conducting business and legal negotiations. If such a need arises, we provide representation services in negotiations on behalf of the party, mediation, and support in the preparation of a memorandum of understanding from negotiations or mediation and, of course, the most detailed settlement possible. 

  1. Strict separation of tasks

This solution sounds quite trivial, but it is potentially incredibly effective. If the division of competences is a bone of contention, a strict, binding division of tasks between individual partners should be clearly written down and even included in the partnership agreement in the form of an annex. 

Developing a harmonious form of cooperation and competences may not only lead to resolving the dispute, but also improve work in the company. This, in turn, will translate directly into increased profits and efficiency. So simple, yet so effective, isn't it? 

However, it is important to determine the division of responsibilities responsibly and sensibly. Otherwise, its introduction may be the beginning of further, unnecessary and harmful disputes. In this regard, it is again a good idea to hire an experienced lawyer who understands practical business problems and has the ability to translate solutions to problems into appropriate contractual provisions. 

  1. Creation of an external management board 

Sometimes, when the parties are unable to reach an agreement, it is necessary to reach out to someone from the outside who will reliably assess the situation. If there is a conflict between partners that the current management of the company is unable to resolve, you should consider seeking help from professionals from outside the company. They, as if they were arbitrators, will be able to resolve the dispute. They will only focus on proper functioning, not on deepening the problems. This is an unusual and decisive step, but it is significantly used and often effective. 

In this respect, advice is needed in carrying out the entire legal process and selecting appropriate people for the external/ad hoc management board. Because we constantly help business participants in such situations, we have appropriate experience and contacts in this field, and we also cooperate with top headhunting companies that are less known to the general public. 

  1. Buyout of one partner by the other/others 

If a situation arises that one of the partners is a problem and the rest want to get rid of him from the company - this solution seems to be ideal. Also, if one of the two conflicting partners has the financial capacity to buy the other's shares, this option is attractive. 

There is not much to explain here - on the one hand, there is money at stake, and on the other, shares/shares. The partner disappears from the list of partners, and with him, at least for some time, the problem disappears. This solution has its advantages and disadvantages. This is also a very interesting solution because it does not have to end in a simple argument about money. Very often, such a dispute is solved by original mechanisms that allow the determination of the amount and payment of part of the price in the future.

  1. Separation of part of the company 

This solution involves dividing the company by separating one or more smaller companies from the "main" company, which would be entitled to the shareholder or partners independently of each other. For this purpose, part of the assets of the current company should be transferred to an existing company or to a company that is being established. Then the conflicting partners no longer have to cooperate with each other, because one, some or all of them get their own "piece of the cake" from the current company. 

However, the whole operation is quite complicated from a formal point of view, which means it requires a responsible and meticulous approach. It can be said that it is impossible to carry out it without the help of a professional. As part of the law firm's practice, we have carried out company transformation projects, including divisions and, therefore, separations. This solution undoubtedly has its advantages and disadvantages, and it can potentially solve the problem very effectively, which means that it is worth your attention.

Of course, depending on the nature of the conflict and the decisions of the partners, sometimes the separation is virtual at the beginning.

  1. Redemption of shares by a third party 

If the remaining partners do not have the funds or are not interested in buying the shares of the one they want to get rid of from the company or the one who wants to resign, the purchase of his stake by a third party is an option. The main disadvantage in this respect is the requirement to look for an interested party, conduct negotiations and carry out a broad, complicated process. On the other hand, it may also be related to earnings. In one of the cases we handled, we found a willing buyer thanks to whom the partners earned PLN 21 million instead of PLN 11 million, which they would have been able to earn by trading shares "inside the partners". This also resulted in additional investment in the company itself.

As this example shows, it's worth it. It is worth considering this option and trusting us. 

  1. Dissolution of the company by the court

This seems to be the most far-reaching solution because it leaves a "scorched earth" effect. All partners lose here, but if there is a deep dispute in which the parties refuse any cooperation, this option may be necessary. Practice shows that it is better to use one of the options described above. 

Dissolution of the company by the court is described in Art. 271 of the Commercial Companies Code and requires a shareholder to sue the company. The lawsuit itself costs PLN 2,000, and there will also be incidental costs, including lawyer's fees. The company is dissolved after liquidation within the meaning of the provisions of the Commercial Companies Code. This involves the liquidation of its assets by the liquidators in order to satisfy or secure the company's creditors. The remaining part is distributed among partners or shareholders - depending on the type of company. 

It is possible that the partners will lose money during the entire operation - if the amount obtained by the liquidators is insufficient, they are burdened with debt in relation to the shares they hold. 

Therefore, if you decide on this option, it is so important to seek the help of an experienced attorney. You should approach the matter carefully, because it is easy to incur additional and unnecessary costs or even take on unnecessary debt. As part of the services provided by the Kłodziński Law Firm, we assist in the liquidation of companies, so we also represent partners or the company in court in the described scope. 

At the end 

The conflict resolution model and specific proposals for resolving disputes between partners in the company are presented above. Of course, it is difficult to create a universal answer to the question of how to overcome such problems. Every situation is different, which means that each of them requires different solutions. 

As part of the services provided by our office legal services for companies We have significantly helped many entities and partners resolve serious conflicts. Also the media ones. Thanks to the combination of theoretical and practical knowledge regarding business solutions and legal knowledge, as well as both "conflict and business" experience, we can say with a clear conscience that we have the know-how to professionally support entrepreneurs in resolving conflicts in companies.

We help find the best solution and convince all parties to it - that is, save time, nerves, and, above all, resolve the dispute as elegantly as possible. 

What is also important, the solutions presented above can be combined. Often, it is only when all parties are forced to be fully open, i.e. the so-called putting all the cards on the table and convincing the other side that they have no more cards allows you to make the right decision. Conflicts arise where there is a lot of uncertainty, ignorance and lack of trust. Before we start work, we must prepare well for such negotiations - this means that our clients will have to devote some time to us. The more time we spend on preparations, the greater the chance of a successful conclusion to the negotiations.

As has already been mentioned several times, we have extensive experience in resolving conflicts between partners. At every stage, both from a business, interpersonal and legal point of view, we are ready to handle the case and do everything necessary to resolve the dispute as effectively as possible. That's why we always invite you to a no-obligation initial consultation, it is worth presenting your case to us and hearing how we can help you.
Usually, when we enter the game, everyone has to make some concessions, but very often we manage to find a "win-win" solution in the end.

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