This article focuses on the disputes between shareholders and the board, and how lawyers handle them. How lawyers work it out, negotiate between them, and handle the smooth functioning between the two power positions in a company.

Shareholders and Board relationship

Conflicts between the company's board and shareholders need no introduction as they are quite inevitable in most public and private companies. Shareholders are the owners of the company who hold a certain equity percentage of the company shares. Shareholders have the fiduciary right to appoint or remove the directors of the company or the number of directors on the board etc.


Meanwhile, the company board is liable to look after the management while ensuring smooth operations within the company in day-to-day activities. The investments circulated in or out of the company are looked after by the Board of Directors, keeping the company's best interest forward.

Any shareholder and board conflict pushes back the company on overall functionality, stability in relationships, and the spread out sustainability. For a company to grow, perform with efficiency, and have a seamless function in management, an intact and healthy relationship reflects a paramount synergy between the shareholder and board. The Board in the long run has to accomplish proper management of the company which ensures the maximum value for the shareholders.

Understanding the nature of conflict and their types;

Although any dispute between the shareholder and Board arises due to varied reasons across organizations, when they arise they need to be resolved quickly and efficiently. Any overdue prolonged dispute can harm the growth, stability, and functioning of any organization.

The disputes commonly arise due to conflict of interest, breach of fiduciary duty or any clause of the shareholder agreement, varied vision in resource allocation, management, and company functionality. The common grounds for disputes between the shareholder and board are listed and elaborated further in detail below;

1. Non-agreement over business management: Shareholders may raise a concern when the company or its management is not functioning on the expected lines. In such scenarios, the Director abuses his position and engages in activities that go against the shareholder. Any misconduct that goes against the principal lines affects the company's operations and directly causes concern to shareholders' interests.
    
2. Breach of shareholder agreement: All the roles, responsibilities, duties along with the relationship of shareholders against the company are incorporated in the shareholder agreement. SHA protects the interests of the shareholder as well along with containing individual rights and dispute resolution clauses. Any director breaching the terms that cause a concern to SHA over provisions like special voting rights, exits, transfer of shares, appointment of directors, etc., can stir an unwanted conflict resulting in legal action against the company.
    
3. Conflict of interest: Shareholders and the board may find each other at a crossroads when a Director acts, performs, or authorizes any outcome for personal gain that directly or indirectly impacts the company either directly or indirectly. The board is appointed and formed by the Shareholders, therefore the Board needs to act in the best interest of the SH. When the board of any of its members anticipates a conflict of interest, it should be promptly conveyed to shareholders if not could spark a conflict between the management.
    
4. Shareholder exploitation: Conflicts can arise when minority SHs realize the unfair treatment they have been getting by the management or how they are always unfavoured against the majority shareholders. Therefore any deceptive operation, or information treatment by the management that suppresses the voice, rights, and opinion of minority shareholders, will ignite an unnecessary dispute. Therefore having transparency concerning all the operations of management, equity transactions, and other relevant causes will slim down the chances of any dispute.

How do lawyers prevent the conflict?

The medical proverb Prevention is better than cure still fancies an effective method in the legal arena. Lawyers are often seen as the profession that resolves disputes. The lawyers working around the shareholder and board are the ones that approach to foresee adverse events, which could hamper the shareholder's relation. prevent a potential conflict.

1. Clear communication: Clear communication along with expectations and deliverables helps in reducing the uncertainties that could form a dispute. Transparent and consistent communication followed by regular meetings which outline the role and responsibilities of each party ensuring compliance.
2. Precise agreements: Shareholder agreements are a primary document that formalizes and shapes the rights, relationships, and duties of the shareholder to the company. SHA protects the interest of the shareholder and how the company will be operated and managed. A well-crafted shareholder agreement that is inclusive of all the major and relevant clauses can prevent disputes even before its initiation. Shareholder agreement has to regularly be revised or amended as per the updated relevant applicable laws.
3. Foreseeing potential legal disputes: Shareholder agreement can include Alternate Dispute Resolution action mandatory through the means of mediation or arbitration before any of the parties initiate a litigation case.
4. Constant governance: Continuous monitoring of legal compliance, frequent audits, mitigating risk management, and transparency can benefit by catching the conflict early and shutting it down.

How do Lawyers Resolve the conflicts?

1. Determining the root cause:

   The first and foremost antidote to any rising conflict is to locate the root cause of the conflict. Tracing the dispute back to its origin helps one understand the timelines of the issue, and how it has originated and evolved into a dispute. Any dispute that is resolved at the utmost initiation helps the company to function without any hassle in the long run. If minority shareholders claim that the board has breached its fiduciary duties, the lawyer must analyze whether the conflict is originating from issues like:

   • Inadequate financial management
   • Lack of transparency in decision-making
   • Improper management of funds
      
2. Understand the conflict:

   Once the dispute is traced, it is followed with questions like:

   • Why did it occur?
   • What consequences led to this?
   • How will this affect the company?

   Each conflict requires to be viewed alone in its entirety and managed consequently. Understanding the conflict with its implications, the scale of the problem, and its effect comes secondary. The issue lies with Lawyers to understand is every position in the management—be it of a shareholder or the board—both have a varied point of view and have diverse goals. This step involves reviewing shareholder agreements, board resolutions, and corporate governance policies to further comprehend the accountability of such actions.
    

3. Assessing potential solutions:

   Once the issue at hand is understood, the Lawyer then searches for potential solutions to the dispute. Various metrics need to be considered while navigating a path that is satisfactory for all disputed parties, minimizing the loss for the company, keeping the shareholder's interest upfront, and so on. The final agreed solution has to comply with all the internal corporate governance policies and should not violate any rights concerning the shareholder's agreement.
    

4. Implementing and executing:

   This is the final step by Lawyers in resolving a conflict. The final step mostly accounts for implementing the proposed amendments, updating the shareholders and directors, and relevant agreements, along with revising policies to align them with the agreed solution. This final step involves ensuring all the necessary compliances are met to avoid any unforeseen disputes in the future.

Role of Lawyers in handling conflicts:

1. Negotiation: The earliest resort to handle a corporate conflict is by negotiating with the parties at the forefront before letting it escalate. Lawyers can help initiate and engage in a constructive dialogue exchange between the shareholder and board where they put forward their thoughts and possibly arrive at a settlement. Negotiating a dispute while retaining all the demands and compromising on a few demands helps keep the shareholder's relationship intact and, in addition, saves the cost of litigation.
2. Alternate Dispute Resolution: If the dispute cannot be resolved or no compromise is made by any party to the dispute, then on any end, it is forwarded to Arbitration. Any conflict that concerns or is related to shareholders is usually handled by the dispute resolution mechanism which resolves the deadlock. ADR methods involve mechanisms like Arbitration and Mediation where a dispute can be settled before litigation in amicable means. ADR mechanisms are typically private and confidential but are beneficial while dealing with critical aspects like shareholder disputes. Any breach or leak of such dispute into the public domain can affect the stock prices and push shareholders to lower investor confidence in the company.
   • Mediation: A neutral mediator is appointed by both parties and, after numerous meetings, the mediator helps the shareholder and board arrive at a mutual standing. The mediator does not pass any binding order on the dispute but instead suggests ways in which a conflict can be neutralized while retaining the satisfaction of both parties.
   • Arbitration: The Arbitrator can mitigate the dispute and give a final judgment call by passing a binding order on parties to the dispute. The parties are bound to comply with the order passed; any breach will create a legal liability on them.
3. Litigation: When internal negotiations, settlements, and dispute resolution tools fail, the only final resort left is Litigation. The court route, however, is costly, time-consuming, and public. Lawyers can file the case, represent the client, and put forward their respective client demands. The complexities of corporate disputes are such that there should be rightful representation of complex scenarios by lawyers to get a positive outcome.

Cyrus Mistry vs Tata Sons: A relevant case study

The Tata Sons vs. Cyrus Mistry is a landmark case that revolves around the conflicts between shareholders and the board. In 2016, Cyrus Mistry, the Chairman of Tata Sons, was unexpectedly terminated from his position by the board. Mistry was representing the Shapoorji Pallonji Group which was a minority shareholder with an 18.4% stake in Tata Sons. Cyrus Mistry challenged this decision, alleging mismanagement and oppression of minority shareholders by the majority shareholders, represented by Tata.

Mistry argued that his removal was rather unplanned and had no transparency in it. He further accused the Tata board of violating its fiduciary duty and putting forward the interests of the majority shareholders over that of the minority. On the other hand, Tata Sons argued that Mistry's leadership manner did not align with the company's vision, and hence resulted in his removal from the position of chairman which was in the best interest of the company. The case moved through the NCLT, NCLAT, and ultimately, the Supreme Court of India, which ruled in favor of Tata Sons in 2021, stating that Mistry's removal was lawful and did not constitute oppression or mismanagement.

This case demonstrates the complexities involved in a shareholder and board dispute as it was litigated for nearly four years. The case highlighted how disagreements in business approach, lack of proper corporate governance, and suppression of minority shareholders can transpire into a legal battle. Although the Tata Group secured the legal victory against Cyrus Mistry, the case was dragged publicly for four years and one can only imagine how much potential loss or humiliation in addition to legal costs these groups might have faced. Therefore this case in hindsight advocates for dispute resolution mechanisms to be much more effective and efficient than litigation.

Conclusion
The shareholders vs directors dispute is a complicated issue in India and therefore demands a multi-faceted approach. Understanding the issue, finding a satisfying solution that pleases both parties and implementing it thoroughly is vital to maintaining a healthy relationship with the shareholders. Lawyers therefore are proactive, swift, and diligent while dealing with such complex legal issues that impact the company directly. 

Considering the various kinds of conflicts that usually arise, there is no universal solution for resolving them between shareholders and boards, as each company, along with its shareholders, board, management, functionality, and operations, is unique in its way. A lawyer acts as an intermediary who oversees governance, compliance, and overall functionality to identify a solution that protects the interests of all parties without causing harm to the interests of shareholders and the board.

References:

1. PTI, & PTI. (2021, March 26). Here's everything you need to know about the Tata-Mistry tussle. Deccan Herald. https://www.deccanherald.com/business/heres-everything-you-need-to-know-about-the-tata-mistry-tussle-966739.html