By Ajay Maraj
In the national budget for the fiscal year 2025, local Small and Medium Enterprises (“SMEs”) were noted to generate revenue, create employment and boost foreign exchange earnings with non-energy exports from SMEs being valued at US$2.4billon in 2022. With this in mind, the success and long-term viability of SMEs can be said to be of increasing importance in Trinidad and Tobago.
SMEs are generally classed into two categories:
(i) small enterprises which employ between 6-25 workers and generate sales in the sum of $500,000 to $2.99 million, and
(ii) medium sized enterprises employ between 26-50 workers and have sales of $3 million to $50 million.
Director and shareholder disputes are often overlooked threats to SMEs. While disagreement is expected in the ordinary course of business, if mismanaged, director and shareholder disputes can lead to disruption in SMEs’ operations as well as legal, financial and inter-personal complications which threaten the long-term viability of companies. . When faced with conflict, directors and shareholders often resort to litigation as their first course of action. While litigation can indeed be used to resolve disputes of this nature, the implementation of proactive dispute resolution strategies can be used to effectively manage director and shareholder disputes and avoid litigation altogether. Litigation of director and shareholder issues can be expensive and time consuming. Additionally, litigation often further strains the relationship between the members of the company and can result in the court becoming involved in company affairs which is less than ideal.
This article briefly explores dispute resolution strategies which can be implemented to effectively manage and resolve director and shareholder disputes.
Establish clear roles and responsibilities
Given the size and nature of SMEs it is not uncommon for persons to play multiple roles within the companies. Often, persons can act as both director and shareholder within the same company thereby having input into the day-to-day management of the company and voting rights at the shareholder level. Where there is confusion as to the role, responsibilities and entitlements of persons within a company, disputes are likely to arise.
A crucial step in pro-actively managing director and shareholder disputes is to clearly define the roles and responsibilities for both offices at the incorporation of the SME. The SMEs governing documents such as its articles of incorporation, bye-laws, organisational resolution and initial shareholder agreements (if any), should be prepared in a manner to clearly set out the roles, responsibilities, rights, entitlements and scope of power for directors, shareholders and any other offices created as part of the company’s organisational structure.
If drafted properly, the constitutional documents of the company can assist in preventing disputes between and amongst directors and shareholders as each member would be fully aware of their responsibilities and scope of power within the company.
Strategic shareholders’ agreements
A comprehensive shareholders’ agreement can be used to further establish clarity between the shareholders as to their roles, responsibilities, rights and entitlements within an SME. This is particularly important when dealing with minority shareholders who can often feel aggrieved if their shareholding (whether by type or number of shares) does not afford them identical rights and entitlements in comparison to other existing shareholders.
Shareholders’ agreements should be tailored to the specific needs of the given SME which is dependent on the entity’s operations, size, and corporate structure. The shareholder agreement should ideally cover key areas such as:
* Voting rights and procedure;
* Share ownership and share transfer restrictions;
* Entitlement to and payment of dividends;
* Strategic management and decision making requirements;
* Non-compete and confidentiality requirements;
* Deadlock provisions; and
* Exit strategies.
The above list is not exhaustive. For shareholders’ agreements to be effective, the agreements must be tailored to the needs of the particular company and clearly set out (as agreed among the shareholders prior to any dispute) what must occur in circumstances which the SME is likely to encounter.
By proactively addressing these points in a shareholders’ agreement, SMEs can reduce the chances of future disputes as there will be provisions in place to navigate various circumstances which may arise during the company’s operations.
Director and/or shareholder meetings
The first step to resolving a dispute is often negotiation between the parties. Directors and shareholder meetings provide a useful forum within which negotiation of a dispute between relevant parties can occur in a productive manner.
By hosting a formal director and/or shareholder meeting, parties to a dispute are required engage in a structured and moderated environment to fully ventilate issues which may otherwise be ignored and/or prematurely escalated to litigation. The structured nature of director and shareholder meetings require, among other things, an agenda which forces the parties to clarify and engage directly on issues thereby decreasing the possibility of miscommunication and focuses discussions on the root cause of the conflict. Using director and/or shareholder meetings as a forum to resolve a dispute within a company also has the added benefit of allowing persons who are not involved in the dispute (other directors and shareholders) to voice their opinions, act as mediators (if appropriate), and vote on issues which will affect the company.
Director and shareholder meetings also require formal minutes to be taken, ensuring that all decisions and agreements are documented. This allows for the discussions surrounding disputes between members of SMEs and the resolutions to same to be recorded in the records of the companies. This record assists with making persons accountable for their statements and actions, thereby reducing the likelihood of the dispute continuing after the meeting.
Exit clauses and buy-sell agreements
In some instances, the relationship between the parties is damaged beyond repair and is in unlikely to be resolved through alternative dispute resolution methods such as negotiation or mediation. In these circumstances, the most effective way to resolve a dispute may be for one party to exit the company.
Exit clauses and buy-sell agreements can be inserted in the Strategic Shareholder Agreements mentioned above to facilitate a seamless exit for shareholders of a company by providing a clear framework for how their shares can be sold and/or bought out.
Exit clauses and buy-sell agreements should at minimum include and clearly regulate factors such as: (i) how shares of the exiting shareholder(s) should be valued, (ii) who is permitted to buy the shares of the exiting shareholder(s), and (iii) trigger events which will prompt the exit of an existing shareholder from the company.
Though not ideal, where the relationship between directors and shareholders become strained beyond repair, it is more strategic to have a party to the company exit on pre-agreed terms instead of remaining in the company to further frustrate business operations. Having these provisions in place ensures that there is a clear method for resolving ownership disputes in the event that professional and/or personal relationships amongst shareholders become strained beyond repair.
Litigation proceedings
Litigation should be the final point of call for resolving director and shareholder disputes as it can have a detrimental impact on company’s operations and long-term viability. The laws of T&T provide the court with wide powers to intervene in the affairs of a company in the event of a finding of oppressive and/or unfairly prejudicial conduct. These powers include the ability of the court to (among other things) regulate a company’s affairs by amending its constitutional documents, issuing or exchanging shares, appointing directors, and even winding up the company.
Notwithstanding the above, litigation can prove to be a useful tool in resolving director and shareholder disputes where the alternative dispute resolution methods are not effective.
Conclusion
Director and shareholder disputes are to be expected in the ordinary course of business. Failure to properly manage director and shareholder disputes can result in operational disruptions to SMEs, lead to financial loss, and have a negative effect on companies’ reputations. By establishing clear roles and responsibilities, implementing strategic shareholder agreements, and fostering open communication through frequent director and shareholder meetings, SMEs can manage disputes effectively and limit the possible negative impacts on their long-term viability.
Ajay Maraj is an Associate at M. Hamel-Smith & Co. He can be reached at mhs@trinidadlaw.com
Disclaimer: This Column contains general information on legal topics and does not constitute legal advice
