Corporate conflicts: reasons and ways to overcome
Source: Економічна правда
The crisis is a challenge. As in family relationships, in a partnership crisis either strengthens the relationship between partners, uniting them in the struggle for the survival of the business or reveals problems that did not come out before. Working recommendations on how to avoid corporate conflicts from a lawyer and business owner, managing partner of the law firm Legal House.
Before talking on how to avoid corporate conflict, the causes of conflicts shall be understood. I have TOP-8 reasons that lead to corporate conflicts:
- Business registration for another person (nominal owner)
Quite often, a business is legally registered not for the ultimate owner, but for a close relative, girlfriend, childhood friend, driver or one of the partners. The reasons may be different: government service, politics, legal or criminal prosecution, “unwillingness to be in the public eye”, the inability to declare an owner, since there is some discrepancy with the requirements of the regulator (financial companies, gaming companies), etc. I’ll say right away – this is not the best idea. As a rule, such registration takes place without drawing up any documents, since “we trust each other” and it is not even allowed to think that a person “whom we fully trust” may at one moment think that he is the sole owner and / or begin to believe that he also has the right to a share, since he did a lot for development of the company. The accelerator for this behavior can be different: a quarrel with the beneficiary, divorce, death of the nominal owner and the emerging heirs who begin to believe that the business belongs to the deceased, greed, “difficult life” circumstances of the nominal owner.
- Allocation of shares in the proportion of 50 to 50
The allocation of shares in the proportion of 50 to 50 is the path to corporate conflict in 99% of cases. Despite the fact that initially it does not look like as corporate conflict. After all, legally – the owners are equal and none of them can make a decision without the other. And this is a deadlock. As long as partners understand and respect each other, behave decently and honestly towards each other this is not a problem, the problem begins after they stop negotiating. Each of the partners has different vision of a way out from such situation and being in conflict it becomes difficult, almost impossible, to listen to and hear the other partner, and this, in turn, leads to long and ongoing corporate wars. Such conflicts often end in significant financial losses both for the business and for each of the partners and sometimes even bankruptcy.
- Incorrect initial assessment of the contributions of partners in business
The business contribution shall accurately reflect the share of each partner. An incorrect assessment of the contribution leads to the division of shares in the company knowingly unfairly. Often partners, when assessing the share / contribution of each of them, evaluate only what can be expressed in monetary terms, for example: real estate, machinery, equipment, securities. Elements such as intangible assets: professional skills, personal contacts, intellectual property (technology, copyright), customer bases, personal brand, etc. – are not taken into account when forming the partner’s contribution. Underestimated contribution = partner dissatisfaction. Let this dissatisfaction not appear at the very beginning, but in combination with other factors will play a bad role for the business in the future.
- Unjustified expectations
Back in 1992, media Inc. conducted a study, the results of which were published in the article “Are Partners Bad for Business?”. According to the study, unjustified expectations caused the collapse of a huge number of partnerships, and, moreover, the respondents surveyed pass up partners precisely because of “unjustified expectations”. Not meeting a partner’s expectations is to betray the partner’s trust. The reasons for unjustified expectations are often the fact that one of the partners promises more than it can deliver or the partners do not talk about the expectations of each other. And if everything is clear with the first reason, then the second reason is a big problem. Studies have shown that partners either do not speak at all about their expectations from each other or they believe that they discussed everything, although in fact they touched on these issues in passing. Therefore, it is important at the stage of registration of a partnership to speak in great detail everything that each of the partners expects from the partnership as a whole and from each of the partners. This will help protect the partnership from the “destructive power of unjustified expectations.”
- Financial problems or financial success
In partnership, everything is the same as in marriage: both in sorrow and in joy. Not all partnerships stand the test of hardship. Practice shows that they often lead to disagreements. A conflict may arise due to the fact that the business does not bring the expected profit (or even operates at a loss) or does not develop as quickly as wished it to be. The reasons for failure can be, for example: delayed financing; unskilled management; objective difficulties in capturing the market; problems with the manufactured product (which is worse than that of competitors). Financial success is the opposite of financial problems, but with the same consequences. Partners may not pass the test with money. Often, partners are doing well until the first million appears to be divided. And here various moments emerge: incorrect assessment of deposits, unjustified expectations, old grievances, disagreements on the basis of “investing in a company or distributing profits?”.
- Unassigned roles of partners in business
It is important to assign the roles, areas of responsibility, the degree of participation and involvement in the business of each of the partners. This can happen at every stage of doing business, depending on the needs of the business and, very importantly, the qualifications of the partner. If distribution has occurred, partners should not take over the function of another partner. If a partner plays the role of a passive investor, he should not meddle in operational activities if this function is assigned to another participant. Competent assignment of power, building corporate governance and the role of partners in this are important elements for the normal functioning of a business. Partners shall pragmatically and honestly assess the need for employees, the qualifications of employees, their skills and how well they fit as employees. To honestly answer the question of whether they are ready / able to perform their functions with high quality.
Different personal values
Personal values represent people’s beliefs about life and acceptable behavior. They express the goals that drive a person and the corresponding ways to achieve them. Values are pointers by which people navigate in search of a way out of everyday delicate situations. In the joint management of a company personal values appears themselves in different ways – from approaches to paying taxes, principles and transparency of accounting, calculation and payment of wages to determining the future and attitude towards the company’s employees. Very often a difference in the level of values leads to corporate conflicts and the termination of partnerships.
Trust is an important element of a partnership. Cooperation is built on trust, and trust is built in cooperation – this is a vicious circle. Again, it is easier for partners to trust those who share their values. Mistrust is also possible as a consequence of the negative experience gained by one of the partners (all partners) from a previous business where fraud took place.
How to avoid corporate conflict?
- Do not register the business for proxies or for one of the partners. Incorrect business registration leads to complex, often insoluble conflicts. If there is no other way and you are forced to use the services of a “nominee”, be sure to conclude an appropriate agreement with him, even if this is your close relative. Such agreement shall contain provisions stating that the “nominee” owner owns the business in your interests, receives payment for his services (even if just symbolic), undertakes to re-register all corporate rights to the real owner upon request.
- Avoid allocation of shares in a 50-50 ratio. Allocation of shares in proportion if 50 to 50 is usually a simple equalization. This allocation shall be avoided. One of the methods that is used in world practice is to transfer the minimum share to a third party, which will regulate disagreements among partners that arise when voting on issues of activity. At the same time, such mediator will take the position of one of the partners, giving him an advantage over the second partner and not leading the situation into a deadlock. The problem with this method is that it is practically impossible to find a truly independent mediator in the Ukrainian realities. The second option is to draw up and sign a shareholder agreement in which spell out ways to get out of deadlocks.
- Pay special attention to the preparation of both statutory documents and agreements with key employees (CEO, CFO, COO, etc.). Particular attention should be paid to such procedures:
– calling and holding a meeting of shareholders;
– the procedure for the election, appointment, removal, dismissal of the head. In this case, you should firsthand stipulate the minimum requirements that the candidate for the position shall meet; register who cannot be head (for example, a close relative of one of the partners);
– the procedure for the exit of a partner from the business, sale of a share to a third party, other features of alienation (exchange, donation, will of the decedent, etc.);
– restrictions on the powers of management, i.e. the procedure for approval of material transactions, clearly define which transactions are material;
– introduce mandatory approval of strategic documents.
- Conclude a shareholder agreement. In Ukraine, since 2018, the conclusion of shareholder agreements has been regulated at the legislative level. The value of a shareholder agreement is that it allows you to consolidate in it all the agreements of partners that they reached before the start of the partnership, as well as during the partnership. Shareholder agreement can and should contain a scenario of separation of “partners” in the event of termination of the partnership, the obligation of the parties to agree on the acquisition or alienation of a share at a predetermined price and / or in the event of the occurrence of circumstances specified in the agreement, the obligation to refrain from alienation of shares until the occurrence of those specified in the agreement circumstances. What is important, it is necessary to prescribe an approach in determining the value of a share (assessing a share), what formula, method will be used, who will be the appraiser, and much more. Thus, in shareholder agreements it is possible to settle a number of potential corporate conflicts and “deadlock situations” that may arise between the participants of the company.
- It is very important to know the values of other people and especially if these people are your partners. Knowing your partners’ values and understanding how they are relevant to yours is essential. Despite the fact that most values are acquired in childhood, some of them are formed later under the influence of the life experience of respected people. Some values remain unchanged throughout life, others appear and disappear as a result of changes in life circumstances or personal changes.
Partners should openly discuss differences in values, discuss all aspects of work that cause mistrust and, as a result, agree on all the nuances of joint work so that differences, omissions, suspicions do not get in their way.