Commentary on shareholder disputes

Part 2: Causes of shareholder disputes in joint stock companies

Commentary on shareholder disputes - Part 2: Causes of shareholder disputes in joint stock companies
Commentary on shareholder disputes - Part 2: Causes of shareholder disputes in joint stock companies

In the previous article, we found out about common shareholder disputes. So what are the reasons for arising of these disputes? Is it because of choosing an inappropriate partner or from ambiguity in agreements between shareholders, and what do the parties need to do to avoid them? The content analyzed below will help readers who are soon-to-be shareholders or current shareholders to anticipate potential risks and plan actions to harmonize the relationship between shareholders and thereby maintain the company’s sustainable development.

Shareholders do not understand the regulations

It is considered a common cause. Usually, shareholders will only be interested in matters surrounding the company’s business plan, options for finding customers, building a brand and forget about internal construction and control, or have only focused on employees and ignore the relationship’s power and balance between shareholders. Or shareholder compliance was not noticed in the company’s early days since everything was new, there was no significant revenue or there were few collisions of rights and interests. However, as it grows to a certain extent, shareholders begin to pay attention to the compliance of others on what is committed.

At this time, 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.

The will of shareholders has not been recorded fully 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 enterprise, such as the way a business operates, the rights and obligations of shareholders to the company. However, it should be understood that the company charter is not only a written commitment between founding shareholders on the establishment but also a document stipulating the internal management mechanisms and activities of the company. Based on that fact it becomes the first and most important legal basis when a dispute arises. The main purpose of the law on enterprises is to stipulate the basic conditions for the company’s operation. In addition to the mandatory contents, there are also other contents with an open direction for shareholders to agree to and record in the charter to comply with their 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.

Lack of transparency in financial statements and executive decisions

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 company’s revenues and expenditures, shareholders will usually ask the management board to explain. However, since the official handling scheme for this matter has not yet been anticipated, disagreements and internal disputes are unavoidable outcomes.

In fact, financial disagreements are inevitable when operating a business. Accordingly, it is necessary for shareholders to develop a guiding framework for management board to determine their authorities on financial matters, which criteria evaluate an expenditure is reasonable in accordance with 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.

Similar to the issue of transparency in finance, the scope of the management board on making decisions should also be concretized into a guideline. Viewed from the outside, we may assume that it is not necessary for a company to build the said framework for both finance and management, since the authority of the management board is stipulated in legal documents, including the civil code to the law on enterprises, tax – accounting, etc. However, since the said regulations only provide the most general guidance, companies need to concretize these regulations into specific guidelines in their statutes and codes of conduct that will be executed daily. Therefore, these contents should be regulated in a way that will be close to the company’s operation, in accordance with the organizational structure and business activities.

In fact, there are some companies operating for years with the participation of many shareholders, including foreign shareholders. However, shareholder disputes are still rare since they have anticipated potential risks and disagreements and, based on that, build preventive measures and the corresponding solutions. It is considered an important factor in helping companies develop sustainably in the long run. Stability in operations is also a category that investors will consider when planning to invest in any business since if shareholders get along, the investors’ capital flows also have the opportunity to increase profitability.

However, if among shareholders have no common voice in the operation process, how can they resolve their internal disputes? Please read our analysis in Part 3 of this series – Methods of resolving shareholder disputes.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only for reference.