Mediation to resolve conflicts between shareholders

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Conflicts may arise between shareholders during a company's activities. Depending on the type of company, shareholders have several options for unraveling these conflicts. In this article, we will explain why mediation should be at the top of the list of these options. 

To illustrate the benefits of mediation in a shareholder dispute, we will take the example of a small and medium-sized enterprise ("SME") that is not registered on a stock market. In our example, we will assume that the shareholders are natural persons. 

1) The different roles of shareholders:

In an SME, it is common for shareholders to also be founders, board members, managers and employees. The project of an SME is very often linked to a life project for its participants, so that personal involvement is omnipresent. 

The emergence of a conflict between shareholders, especially the majority shareholders, can therefore have several harmful consequences for the SME and all stakeholders. 

2) Possible remedies:

As a first step, it will be necessary to verify whether a shareholders' agreement exists and what remedies are provided in these situations. Ideally, the shareholders' agreement should provide for the use of mediation as a first step. If there is no shareholders' agreement, the option of mediation is still available, but then the shareholders in conflict will have to jointly choose this option. 

Obviously, proceedings before judicial courts or arbitration are options to be considered. However, these options may have limitations in finding solutions. 

For example, before the courts of justice or arbitration, the parties will have to be represented by a lawyer (it is strongly recommended to be). In particular, the judge or arbitrator will have to decide on the rights and obligations of the parties based on the evidence presented and the jurisprudence. Thus, it obliges the parties to develop their arguments toward obtaining a favorable decision on points in law corresponding to each of the roles. Consequently, this means more time and preparation for shareholders and their attorneys. 

Under this counter-argument framework, this can greatly limit opportunities for frank and confidential discussions between the parties that could help resolve their dispute. 

Furthermore, it should not be forgotten that proceedings before judicial courts are public. Thus, there is a risk of causing reputational damage to the SME and affecting its revenues. 

In addition, it can become very difficult to identify the conflict with a particular role of a party. Are the sources of the conflict the result of actions as a shareholder, as an employee, or are they the result of personal disagreements? In most cases, the sources of conflict will be at several levels for an SME.

3) Benefits of mediation in a shareholder dispute:

As we have discussed in previous articles[1], mediation offers many advantages, especially in a conflict between shareholders within an SME. One can think of confidentiality, non-compellability, speed, lower costs and flexibility of the process. 

Mediation will allow the parties to seek practical and applicable solutions for all their roles within the SME. Therefore, the parties will not have to limit their interactions on their role as shareholders but will also be able to elaborate on their participation more broadly.

For example, if one of the sources of the conflict between the parties concerns the SME's growth strategies, it will be possible to discuss it and not just to decide who owns the decision-making power. Moreover, it could lead to the establishment of durable solutions to avoid the recurrence of similar conflicts. 

It is important for conflicting shareholders not to forget that the SME is at the center of their interactions, and in many cases, an important source of income. The prolongation of the conflict or the repetition of similar conflicts can have an impact on the financial performance of the SME. This can lead to a loss of value of the shares held and even in some cases, the bankruptcy of the SME.

In our example, we kept things relatively simple. However, mediation remains beneficial in more complex situations. For example, it is frequent that one of the shareholders is a company or a trust. Sometimes one of the shareholders (natural or legal person) may be outside the country where the conflict is taking place. Consequently, the flexibility offered by mediation makes it possible to adapt the process according to the parties and to avoid a procedural burden for all. 

Finally, it is important to remember that shareholders may even decide to suspend proceedings pending before the courts to attempt mediation[2]. 

4) Conclusion: 

Considering the many benefits of mediation, it is very interesting for shareholders in conflict, or even anticipating a future conflict, to consider this settlement process. Not only can mediation resolve the conflict, but it can also improve the interactions of all parties within a company. 

Simon Blais is a certified mediator in civil, commercial and labour issues. He assists parties in the process of alternative dispute resolution. His expertise in conflict resolution within companies allows him to adapt the mediation process to optimize the establishment of lasting solutions.

The use of the masculine is only intended to lighten the text.

REFERENCE:    

[1] See BLAIS, Simon: "What is mediation?", Blais Legal Services Inc., published on March 10, 2020, accessible at https://blaislegal.ca/art-eng-mediation, as of June 2, 2021; See BLAIS, Simon: "Judicial delays: Mediation offers solutions", Blais Legal Services Inc., published on May 20, 2020, accessible at https://blaislegal.ca/art-eng-jud-delays, as of June 2, 2021.

[2] Quebec’s Code of Civil Procedure, CQLR c C-25.01, article 612.