The previous article introduced common shareholder disputes, whereas this article will follow by expanding their causes. What are the underlying causes of these conflicts? Could it be attributed to errors in selecting incompatible partners, or ambiguities in shareholder agreements? What measures can be implemented to prevent such disputes?
The content below will help readers who are soon-to-be shareholders or current shareholders to prevent disputes between shareholders. This will enable you to plan the necessary actions to harmonize relationships among shareholders and, in turn, maintain the sustainable development of your business.
1. Shareholders do not understand the regulations
This is a common cause. Usually, shareholders concentrate on the company’s business plan, customer acquisition, and brand building, neglecting internal structure, control, or employee focus while disregarding the power balance among shareholders.
Initially, shareholders might overlook compliance issues due to the company’s novelty, insignificant revenue, or minimal conflicts. However, as the company expands and shareholder disputes arise, shareholders start scrutinizing others’ adherence to commitments.
At this stage, some non-compliant contents can be overcome and adjusted by the parties, but some cannot be remedied and entail legal and financial consequences. Typically, some shareholders have not yet fully performed their capital contribution obligations as committed to buying at the company establishment. However, they still enjoy the same benefits as others or sell their shares to third parties.
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2. The will of the shareholders has not been fully recorded in the Company charter
This matter mainly arises from the founding shareholders, who underplay the importance of the charter and use an available template with the basic contents stipulated in the Law on Enterprises. For instance, this includes the way a business operates, as well as the rights and obligations of shareholders to the company. However, the company charter is more than just a written commitment between founding shareholders on the establishment. It also outlines the company’s internal management structure and operations. Based on that fact, it becomes the first and most important legal basis when a dispute arises.
Noticeably, the main purpose of the Law on Enterprises is to stipulate the basic conditions for the company’s operation. Beyond mandatory contents, the charter allows shareholders to include additional agreements tailored to their specific will. Therefore, at the beginning, the founding shareholders should sit together to build the company charter in a specific way and closest to their will.
3. Lack of transparency in financial statements and executive decisions
Lack of transparency in financial statements
At the company establishment stage, shareholders generally did not anticipate the ways of handling nor developed a control process for the management, since the issues related to the company’s financial revenues and expenditures during operation did not receive much attention. Hence, during operation when finding out some unreasonable points or unclear documents in recognition of the company’s revenues and expenditures, shareholders will usually ask the management board to explain these. Without a clear official process in place for handling this issue, disagreements and internal conflicts are likely to arise.
In fact, financial disagreements are also inevitable when operating a business. Accordingly, it is necessary for shareholders to develop a guiding framework for the management board. The framework should clarify the board’s financial powers and set reasonable spending rules to the company’s operation. Once the said framework is established, shareholders must accept financial decisions made by the management board which is in accordance with the agreement.
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Lack of transparency in executive decisions
Similar to the issue of financial transparency, companies should develop specific guidelines to concretize the management board’s decision-making authority. From the perspective of the outside, companies do not need separate frameworks for finance and management since legal documents, including the civil code and enterprise laws, already outline the management board’s authority.
However, since these regulations only provide generic guidance, companies need to turn into specific guidelines within their statutes and codes of conduct for daily operations. Therefore, these contents should closely align with the company’s operation, organizational structure, and business activities.
Many companies have successfully operated for years without major shareholder disputes, even with foreign shareholders. Anticipating potential conflicts and implementing preventive measures is crucial. These measures contribute to long-term stability and attract investors.
This is because investors value operational stability when considering investments. Harmonious shareholder relationships can enhance a company’s appeal to investors. Increased capital flow and profitability can result from a positive shareholder environment.
Find out our other articles related to Dispute Resolution:
- 5 notable points regarding mediation in commercial disputes
- Dispute resolution clauses in business contracts in Vietnam
If shareholders lack a unified voice in the company’s operations, resolving internal disputes can be challenging. Please refer to our analysis for potential solutions:
Part 1: Determine shareholder disputes that often arise in joint-stock companies
Part 3– Methods of resolving shareholder disputes
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