Inside: Advice to shareholders on alternate forms of dispute resolution before litigation

While litigation may seem to be the most obvious recourse, mediation or arbitration may provide better results

There is always a chance of a serious shareholder dispute occurring, even when all of the parties enter into their joint venture with the best of intentions and use their best efforts to head off any potential disputes. If and when such a dispute emerges, the parties will have to find some way to settle the dispute. While litigation may seem to be the most obvious recourse, there are alternative forms of dispute resolution that may provide better results.

Mediation

One method of dispute resolution that has gained popularity over the past two decades is mediation, whether court-ordered or entered into willingly by both parties. While the exact parameters of mediation can vary depending on jurisdiction and what the parties agree to, the general mechanism is that both parties appeal to an impartial third-party, the mediator, for help finding a resolution to their dispute.

The mediator is typically a lawyer or former judge experienced in the area of law at issue or an industry expert in the particular industry involved. Typically, the mediator hears both sides discuss their claims or defenses and the evidence they think will support them. The mediator then meets with the parties together and separately to try and settle the matter. As part of trying to get the parties to settle, the mediator may offer opinions on the merits or value of the claims or defenses. The mediator will offer suggestions on how to resolve the dispute to both sides, but does not reveal anything to a party that the other party has not agreed to being revealed. At the end, if no agreement to resolve the matter is reached, the parties go their separate ways and then must decide whether and how to proceed further.

One main advantage of mediation is that it can be much less combative and adversarial than arbitration or litigation. Whereas the litigation process is, by definition, adversarial, the mediation process is about compromise and negotiation, which might be able to resolve the tension between shareholders, or at least keep things from escalating. Mediation can be particularly useful where the parties intend or hope to continue to do business with each other.

The other big advantage of mediation is that it does not have the time-consuming, and often expensive, procedural requirements of the litigation process. Exactly what rules are in effect will depend on the type of mediation but, generally speaking, a mediator will not impose the same sort of evidentiary or filing requirements as a court would, which would otherwise cost a considerable amount of money in attorney’s fees.

The primary disadvantage of mediation is that it generally does not result in an enforceable judgment. Although the parties may reduce any agreement they reach to writing, it is a contract between the parties and if it is breached, the parties are back in the same situation as before, just with another layer of written agreement. Another disadvantage to mediation is that the mediator does not render a decision or opinion of any kind. While one party may be particularly encouraged by the mediator’s evaluation of its claims, that evaluation generally cannot be shared with a court in litigation and therefore has no use beyond the mediation.

Arbitration

Arbitration can be binding on the parties, so the decision made by an arbitrator has more teeth than a recommendation by a mediator. Unlike mediation, an arbitrator may have the power to issue a binding decision that all parties will have to abide by, and courts will usually enforce these decisions. It is often the case that shareholder agreements will force the parties to use binding arbitration to resolve their disputes.

The advantages of arbitration are that the process captures some of the certainty of the litigation process, while avoiding the expenses and time required by that process. As the decision can binding and if so usually enforceable if the parties have previously agreed that the decision of the arbitrator is binding or if they have been required by law or regulation to submit to binding arbitration, the parties do not need to agree with the arbitrator’s decision for it to have effect. In addition, while there are rules and formalities to be observed in an arbitration hearing, they are less stringent that those of a civil case, and that can often save time and money. Another benefit is that, typically speaking, an arbitrator often has more expertise in matters of business than a judge, and so might be more able to draw upon that knowledge to come up with the most efficient and least damaging solution to a shareholder dispute. Finally, arbitration usually takes considerably less time to prosecute than litigation, which can be an enormous help when a company is deadlocked or otherwise hamstrung because of a shareholder dispute.

The largest problem with arbitration is that there is usually no way to appeal an arbitration award. Combined with the fact that arbitrators are not bound by the same rules of law and evidence as judges, there is a very real possibility that an arbitrator will make an award that seems, to one party at least, to be wholly unfair, and that party will have no real way to appeal the award. It may be possible to file a suit in court to vacate the award, but judges are loath to overturn arbitration decisions except in extreme circumstances, such as a showing of fraud, corruption or extreme misconduct by the arbitrator.

Litigation

Litigation is the traditional method for resolving shareholder disputes and, as a result, does carry with it certain advantages over mediation or arbitration. First, unlike mediation and arbitration, there are a clear set of procedural safeguards put into place designed, in part, to ensure that the most equitable outcome is reached. In addition, if a court should render a decision that one party believes is erroneous, there is an appellate procedure in place to challenge that decision. Finally, when a court order is given, it is readily enforceable. The net result of these advantages is a process marked by certainty and reliability compared to other forms of dispute resolution.

The disadvantages, though, are nearly as stark. Litigation is a slow process, and when a company is in crisis, it often cannot wait months or years for the situation to be resolved. Additionally, the procedural safeguards that work to ensure fairness also drive up the costs of litigation by requiring numerous filings, as well as the costs of discovery. Litigation may result in the best outcome for a shareholder dispute, but the cost in both time and money can be immense, and may ultimately do more harm than good to a struggling corporation.

Knowing when to litigate and, perhaps more importantly, when not to litigate, can be the difference between a company imploding due to internecine strife, and an orderly resolution to a dispute that ultimately strengthens a business. 

Contributing Author

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Thomas Patterson

Thomas E. Patterson started the Patterson Law Firm in 2000. He has 32 years of experience preparing and trying lawsuits for businesses, professionals and entrepreneurs—often...

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