Shareholders conflicts

Updated 01.11.2023

The classic situation

2 shareholders set up a company, the shares of which were divided equally 50/50, and one of them became the manager.

The company has been operating successfully for some time, orders have been growing and profits have been rising, but one day the attitude of the shareholders differed. As the disagreement escalated, they encountered unexpected problems:

— the company did not pay dividends because none of the shareholders had enough votes to make a decision;

— the shareholders could not change the manager because none of them had enough votes to make a decision;

— the shareholder who became the manager was able to act at his own discretion and use the company’s resources, as the manager is allowed to make many decisions without the consent of the shareholders;

— the manager could fire another shareholder (who worked for the company) and separate him from the company’s activities.

Unfortunately, such situations occur often and regardless of the number of shareholders in the company.

Shareholders’ agreement

To avoid similar situations, shareholders can enter into a shareholders ’agreement and agree on how they will behave in certain situations.

For example, shareholders may agree that if the shareholders do not make a decision on the distribution of profits, the company must pay a proportion of the distributable profits as dividends.

The shareholders may agree that the manager is appointed for a specified period, after which the decision on the manager is made by another shareholder.

Shareholders may also agree: how the shares would be redeemed if they could no longer work together; whether shareholders can engage in competing activities; how the shareholder can obtain information about the company’s activities; and other issues.

A shareholders’ agreement can be concluded when setting up a new company or already in operation, it is important to do so before the start of disagreements.