Shareholder disputes can be complex and disruptive, often arising from breakdowns in relations between shareholders. Such conflicts encompass a range of issues and are traditionally resolved through litigation.
Arran Dowling-Hussey BL and Catherine Needham BL discuss how mediation and arbitration are increasingly recognised as viable alternatives to litigation, offering quicker, confidential, and more cost-effective resolution.
Shareholder Disputes: What are they?
There are a wide range of disputes that emerge when relations breakdown between shareholders. A non-exhaustive list that can arise include: minority shareholders excluded from the management of a company; a group of shareholders acting so as to harm the interests of other shareholders; a shareholder-director may be acting fraudulently or otherwise in breach of duties owed to the company and shareholders may disagree on the company’s future direction. Where there is no agreed existing dispute resolution process the method by which these disputes will be resolved is by litigation. Whilst recent years have seen a greater use of mediation and arbitration, in these circumstances, even more use of these methods could be made, and this would usually be beneficial to those entangled in shareholder disputes. Traditional court litigation is usually longer and more costly than mediation and arbitration and unlike the latter two processes is conducted in public.
How disruptive can shareholder disputes be?
One recent example of a shareholder dispute can be seen in the Court of Appeal judgment of Mascarenhas v Karim & Another [2022] IECA 48. Tiago Mascarenhas brought an application claiming shareholder oppression, in relation to a company SEDA (Skills & Enterprise Development Academy) Limited running an English language college in Dublin, under section 212 of the Companies Act 2014. The difficulties between the parties arose in 2015 and proceedings were issued the following year. It took until 2019 for the case to be concluded in the High Court. Costello J’s judgement was then issued in March, 2022 around 7 years after the parties relationship broke down. The financial (and time) commitments arising from a dispute running this long would obviously be most considerable. Proceedings in this case were issued the year before the 2017 Mediation Act brought the use of this Alternative Dispute Resolution (‘ADR’) method to the fore.
Best (alternative) tool for the job?
Mediation is a dispute resolution method that is user friendly and many who have been uninvolved in litigation will have a sense of what will be involved. Consistently over the years, in a range of countries, research has shown that the process has a success rate of between 60-80%. However, it will never be the answer with each and every dispute.
Mediation is a consensual process that requires both sides to have a bona fide intent to try and resolve the dispute under the framework of support a mediator can provide. It is hard to have an ongoing relationship after potentially years of litigation is pursued on a win/lose basis through the courts. Mediation can avoid or minimise the bitterness of shareholder disputes which may involve longtime friends and/or family members who have worked together for some time.
However, as in Mascarenhas one of the parties can decline to mediate. As a consequence of this refusal they were, as allowed for under the Mediation Act 2017, penalised in the costs order made by the Court of Appeal. With each year that passes, from the commencement of the 2017 Act, there will be a growing awareness of the risks of refusing to mediate in such circumstances. Nonetheless the present position is between 20-40% of mediations will not conclude with an agreement. Whilst Mascarenhas may not be an archetypal shareholder dispute it will be no great surprise in the adversarial cauldron of litigation, arising from the breakdown in personal relations between shareholders, that the losing side to a High Court application under section 212 of the Companies Act 2014 Act will often go ‘all in’ and issue an appeal.
Tiered dispute resolution?
Along with mediation the best-known ADR method is arbitration. Broadly arbitration (when it works at its best) is quicker and cheaper than litigation. Arbitration is an adjudicative process similar to litigation, but it results in a final binding decision that can not be appealed. It is instead possible to apply to the High Court to have the arbitrator’s award set aside the application is not an appeal but an attempt, akin to an application for judicial review, to argue that there was an irregularity with the course of the arbitration such that it should not be allowed stand but should be set aside. However, since the passage of the 2010 Arbitration Act no more than a handful of awards have been set aside by the High Court. By and large if one agrees to arbitrate, the final word on the matters in dispute will be the expert arbitrator’s award.
The finality this brings will be attractive to those who may find themselves involved in an elongated time frame such as was seen in Mascarenhas. Arbitration can be used on its own or as part of a tiered dispute resolution process known as ‘arb-med’ or ‘med-arb’. It is probably the case that with the majority of mediations that do not succeed that the parties resume litigation in the High Court. Unless the case is in the fast-track Commercial Court the case may not then progress with particular speed and (as already referred to) there is the risk of the looser bringing an appeal.
However, if the unsuccessful mediation is bookended by an arbitration matters will conclude more quickly. Indeed, the parties may agree to what is known as expedited arbitration and can follow defined time periods such that they can have a 100-day arbitration.
Conclusion: The case for mediation
Mediation can be a remarkably successful dispute resolution process which often, but not always, sees an agreement that resolves the differences that have arisen between shareholders. Many shareholder disputes involve friends or family members who have started a business. It can be especially difficult in the shadow of years of court applications for there to be any chance of a continuing relationship. Mediation a party driven facilitative process, which is confidential, quicker and cheaper than the courts, can be used on its own or in conjunction with arbitration to settle shareholder disputes expeditiously.
The views expressed above are the author’s own and do not reflect the views of The Bar of Ireland.