Arbitrating shareholders’ disputes

Arbitration has become an increasingly popular method for resolving disputes between shareholders, particularly in the context of private companies and cross-border transactions. This is due to its confidential nature, the ability to select arbitrators with specific expertise, neutrality, and the general efficiency, finality of the process, and enforceability of the award compared to traditional litigation.

The Rise of Shareholder Arbitration

Shareholder disputes can arise from a variety of issues, including breaches of shareholder agreements, disputes over dividends, allegations of mismanagement, breaches of fiduciary duties, and disagreements over the direction of the company. Shareholders may be outvoted by a majority of shareholders acting contrary to the interest of the company, or an individual director may act in partial ways, for their own best interest or the best interest of another, to the detriment of the company and the other shareholders. 

Arbitration offers a private forum in which these disputes can be resolved confidentially. The confidentiality of arbitration is particularly attractive to shareholders and companies who wish to keep their internal affairs from becoming public knowledge. Moreover, arbitration can be faster than court proceedings, albeit not always, and the parties have more control over the selection of the arbitrator or panel of arbitrators who will decide their case. This allows the parties to choose individuals who have specific expertise in the area of business or law that is relevant to the dispute.

Arbitration Clauses in Shareholder Agreements

The process of arbitration typically finds its genesis in an arbitration clause within the shareholder agreement or the company’s articles of association. This clause will set out the agreement of the parties to submit any disputes to arbitration and may specify the rules under which the arbitration will be conducted, the seat of the arbitration, the number of arbitrators, and the method for their selection.

Arbitration within a company can also aid and foster corporate governance focussed on shareholders. It is therefore important to bind previous, existing, and future shareholders in order to limit conflicting litigation in competing jurisdictions. This can be done by inserting arbitration agreements in both shareholders’ agreements and the company’s articles of association.

The arbitration clause may also specify which institutional rules will govern the process, such as those of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKIAC), the Dubai International Arbitration Centre (DIAC), or the American Arbitration Association (AAA). Alternatively, the parties may choose ad hoc arbitration, where they agree to arbitrate according to their own set of rules or the rules of a national arbitration law.

The Arbitration Process

Once a dispute arises, the process typically begins with the aggrieved party sending a notice of arbitration to the other shareholder(s) and/or the company, as specified in the arbitration clause. The parties will then select an arbitrator or a panel of arbitrators. If the parties cannot agree on an arbitrator, the selection may be made by an appointing authority designated in the arbitration clause or applicable rules.

Once a tribunal is constituted, the parties will submit written arguments and evidence, and the arbitrators will oversee the exchange of information and evidence between the parties, a process that is typically more limited in scope than disclosure in litigation. There may also be a hearing where witnesses can be called and cross-examined. The arbitrators will then deliberate and issue an award.

Enforceability of Arbitration Awards

One of the key benefits of arbitration is the relative ease of enforcing arbitration awards as compared to court judgments, particularly in an international context. This is due to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, which provides for the enforcement of arbitration awards across its more than 170 signatory countries. This can be particularly important in shareholder disputes where the parties may be based in different jurisdictions.

Challenges in Shareholder Arbitration

Despite its advantages, arbitration is not without its challenges. For instance, the private nature of arbitration can be a double-edged sword. While confidentiality can protect the parties and the company, it also means that there is less precedent for other companies and shareholders to refer to when facing similar disputes. Additionally, the finality of arbitration means that there are very limited grounds for challenging an award, which can be a disadvantage if a party believes the arbitrators have made an error.

Furthermore, the costs of arbitration can be significant, particularly in complex cases that require highly specialized arbitrators and extensive proceedings. While arbitration can be quicker than litigation, this is not always the case, and some arbitrations can carry on for extended periods.

Upholding agreements to arbitrate

The English courts have considered the arbitrability of unfair prejudice disputes under English law. Some courts initially took the view that arbitration had to cede way to litigation at certain points.

As far back as Beattie v E & F Beattie Limited (1938) Ch 708 CA, directors named as defendants in a derivative claim brought by shareholders could not invoke an arbitration clause in the company’s articles of association because the board as a whole and the directors as individuals were not privy to the articles of association. Then, in Exeter City Association Football Club Ltd v Football Conference Ltd [2004] EWHC 831 (Ch), the English High Court decided that statutory rights could not be ousted by arbitration when those rights were conferred on shareholders and allowed them to apply to court for relief at any stage in proceedings.

But this approach may be losing favour. In Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 955, the mere mention of the court’s power, in an unfair prejudice petition claim based on section 994 of the Companies Act 2006, was found by the English Court of Appeal not to preclude the arbitral tribunal from exercising a similar function, so long as such permission to continue the claim had no effect on third parties.

Conclusion

Arbitration provides a viable option for the resolution of shareholder disputes. It offers several advantages, including confidentiality, the ability to select specialized arbitrators, neutrality, a generally more efficient process,  finality, and enhanced enforceability. However, parties considering arbitration should be aware of the potential challenges, including costs, the potential for lengthy proceedings, and the limited grounds for challenging an award.

As businesses become more global and shareholders more diverse in their locations and interests, arbitration is likely to continue to grow in popularity as a means of resolving shareholder disputes. The key for any shareholder or company is to carefully draft the arbitration clause in its shareholder agreements and to ensure that all parties understand the implications of agreeing to arbitrate future disputes.

Our expertise

With offices in many of the world’s major financial centres, including London, Paris, Geneva, Zurich, Dubai, Hong Kong and Singapore, we are ideally placed to work with you to prevent, resolve and assist with shareholder disagreements and disputes as they arise, and advise how to avoid them, whatever the law, language, rules, industry sector, or subject matter of that dispute may be. Our dedicated multicultural and multilingual specialists conduct proceedings under both common law and civil systems and regularly advise on the drafting of shareholder agreements and articles of association and act in shareholder-related proceedings.

Whether you are a minority or majority shareholder or a board of a company, our strategically focused specialists will work alongside you. Please contact the authors or your usual Charles Russell Speechly LLP contact if you would like to get in touch.