Most partnerships begin with great trust and verbal understandings, then circumstances change: the business grows, one partner's commitment declines, or views diverge on profit distribution and management. When a dispute arises, the company finds itself hostage to a conflict that may paralyse its decisions and affect its clients and employees. The good news is that many of these disputes can be avoided, or their impact reduced, through early planning.
Prevention starts with the articles of association
The Companies Law gives partners wide latitude to organise their relationship in the articles of association or bylaws, or in a separate shareholders' agreement. The most important matters to regulate include:
- Decision-making mechanism: which decisions require unanimity and which require only a majority.
- Management and powers: who manages the company, the limits of their authority, and how they are removed.
- Profit distribution: when and how profits are distributed, and what is retained to fund growth.
- Partner exit: how a partner sells their stake, the other partners' pre-emption right, and how the stake is valued.
- Deadlock: what happens when votes are tied and decisions stall.
- Dispute resolution: courts or arbitration, with an initial negotiation stage.
Early warning signs not to ignore
- Major decisions taken without the other partners' knowledge.
- Absence or delay of periodic financial reports.
- Mixing company funds with personal funds.
- A partner establishing a competing business.
Dealing with these signs early, by requesting information in writing and documenting objections, protects your rights if the dispute develops later.
If the dispute does arise
The available routes vary according to the nature of the dispute, and include:
- Negotiating the exit of one party by purchasing their stake at a fair valuation, which is often the least costly solution.
- Holding the manager accountable if they harmed the company or exceeded their authority, through the action provided by law.
- Challenging decisions issued in breach of the articles of association or the law.
- Seeking dissolution or liquidation as a last resort when continuing the partnership becomes impossible.
Protect the company during the dispute
A common mistake is letting the dispute become a battle in which the company itself is drained. Make sure daily operations continue, protect accounts and documents, communicate professionally with clients and employees, and avoid any unilateral action that may later count against you.
The role of documentation in settling disputes
In partner disputes, the decisive factor is often what was documented: meeting minutes, partners’ resolutions, financial statements and correspondence on major decisions. Make documenting decisions a permanent habit in your company, even in times of agreement, because it is the reference relied upon when disagreement arises.
Partner disputes are sensitive because they combine personal relationships with commercial interests. Reviewing your articles of association today, before any dispute, is one of the best investments you can make to protect your company.