When tensions arise between shareholders, the impact can severely disrupt business operations. Alternative dispute resolution (ADR) offers a faster, more cost-effective way to settle shareholder disputes than going to court.
Recognizing the common issues and ADR options can help protect business relationships and preserve the company. Here are some important points to consider.
Types of shareholder disputes
Shareholder disputes often center around control, financial decisions or breach of fiduciary duties. In closely held corporations, disagreements may arise when majority shareholders make decisions that minority shareholders view as unfair. Disputes can also involve failure to distribute dividends, mismanagement or exclusion from important business decisions.
ADR options for resolving disputes
Mediation and arbitration are the two most common ADR methods in New York. Mediation involves a neutral third party who helps the shareholders negotiate a voluntary settlement. The mediator does not make decisions. Instead, they guide the discussion and help both sides explore solutions. Mediation is non-binding, so either party can walk away if no agreement is reached.
Arbitration is a more formal process. An arbitrator listens to each party’s arguments and reviews any evidence before issuing a final decision. Unlike mediation, arbitration is usually binding, meaning the parties must accept the outcome. Many shareholder agreements in New York include clauses requiring arbitration for certain disputes.
Benefits and challenges of ADR
ADR is typically faster and less expensive than litigation. It can also be confidential, which helps protect the business reputation. Mediation encourages cooperation, making it a good option for preserving long-term business relationships.
However, ADR is not without challenges. In arbitration, parties may have limited appeal rights. In mediation, a resolution depends on both parties’ willingness to compromise. If emotions run high or power imbalances exist, mediation may be less effective.
For businesses in New York, ADR provides a feasible route to resolving shareholder disputes while avoiding the time and expense of court proceedings. Reviewing shareholder agreements and choosing the right ADR process can help prevent legal disputes.