Lawyer in partnership disputes

Conflicts between shareholders can arise for a number of reasons:

• divergence over the company’s strategy: although everyone is in agreement when the company is set up, differences can arise during the first difficulties or crises, as well as in phases of very rapid growth.
• unequal investment by the partners: beyond the financial investment, inequalities can arise over time in terms of the involvement of each partner in the development of the business. Properly allocating each partner’s role at the outset is a good way of avoiding future conflicts between partners.
• abuse of majority or abuse of minority rights: the voting rights conferred by the company’s articles of association can, like any right, become a source of abuse of rights. This occurs when a shareholder no longer votes in the company’s best interests.

In the most serious cases of disagreement between partners in a company, criminal law comes into play alongside company law. This is the case formisuse of corporate assets. Confusing company assets with personal assets is a mistake fraught with consequences. Fortunately, conflicts between partners can be anticipated and resolved before the company is wound up. To this end, a business lawyer can provide useful support to the company’s directors, partners and founders, while respecting the company’s interests.

Conflicts between founders can arise in all types of company, the most common of which are :

• disputes between partners of an SCI (non-trading property company)
• disputes between partners in a SARL (limited liability company)
• disputes between shareholders of an SAS (simplified joint-stock company).

Companies whose capital is divided into shares (SARL, SCI) are referred to as “associates”, while those whose capital is divided into shares (SAS, SA) are referred to as “shareholders”.

A lawyer to resolve any conflict between partners

Without waiting for relations between partners to deteriorate, the presence of a lawyer is reassuring in preventing disputes before they arise and managing them when they do. A company lawyer can assist minority or majority shareholders, founding partners facing investors, or any other situation. Beyond the conflict between individuals, it is above all a question of protecting the company, its business and its employees.

Goldwin offers its expertise to founders and partners of all types of company. We provide straightforward answers to questions such as :

• Which court has jurisdiction to settle a dispute between partners?
• How do I file a complaint against a partner?
• How do you break a shareholders’ agreement?
• Can a partner be forced to sell his shares?

We take a pragmatic look at the situation, proposing practical solutions and settling conflicts between partners, whether latent or declared.

The most common case is that of a company set up by two equal partners. The slightest disagreement can bring the business to a standstill. In such cases, it is essential to anticipate disagreements between the founders to ensure that the business can continue.

Anticipating disagreements in the articles of association and partnership agreement

Whether the partners are childhood friends or have known each other for a short time, it is hard to imagine a disagreement arising when the company is set up. Everyone is focused on the company’s success. This is one of the reasons why theexpertise of a lawyer specialising in disagreements between partners is so valuable. He can anticipate the worst and foresee future conflicts. Preventing disputes from arising in the first place is absolutely essential to safeguard the company’s future.

Anticipating conflict between partners when drafting the Articles of Association

The first point to consider is the drafting of the company’s Articles of Association. Whether the company is a SCI, SARL or SAS, the Articles of Association are published. It is therefore often preferable to add to them the signature of a partners’ agreement or shareholders’ agreement, which remains confidential. The law and the Articles of Association lay down general rules for resolving conflicts between shareholders, but these are not always adapted to the specific features of the company. It is therefore preferable to anticipate the resolution of future disputes.

In the company’s Articles of Association, the shareholders provide for :

• the voting procedures and the breakdown of capital and voting rights by category of shareholder, if applicable ;
• the organisation of the right to information, in particular access to all the accounts;
• approval clauses for any new partners.

Anticipating disagreements in shareholders’ agreements

The shareholders’ agreement governs relations between the signatories. It is a confidential document that cannot be invoked against third parties. Various clauses are designed to manage :

• corporate governance: control over decisions involving significant investment, appointment of management bodies, organisation of voting rights, etc.
• the distribution of share capital: approval clause for a new partner, pre-emptive right in the event of transfer of shares, joint exit right, etc.
• operations: partners’ exclusivity clause (commitment to invest 100% in the company’s development), non-competition clause, etc.

More specifically, the risks of conflict between partners can be anticipated by :

• anexclusion clause in the event of dismissal of the managing partner or redundancy of the employee partner. Such a clause must be drafted very precisely and be limited to specific cases.
• a bad leaver or good leaver clause sets out the obligation to sell one’s shares at a fixed or determinable price in the event of cessation of functions.
• a buy or sell clause: one of the conflicting partners offers to buy his opponent’s shares at a set price. The latter may accept or refuse. In this case, he must buy the other partner’s shares at the same price.

A lawyer specialising in company law can draft agreements that preserve the necessary balance between the parties, with clauses that are neither too rigid nor too imprecise. He will bear in mind that a shareholders’ agreement must comply with public policy and the Articles of Association, has a relative effect limited to the signatories and cannot be enforced by force. The penalty for non-compliance with an obligation will be financial.

Resolving conflicts between partners through mediation

Goldwin Law Firm provides pre-litigation and litigation services, as well as mediation. A mediation clause in the articles of association or partnership agreement can provide for recourse to a mediator. This is an interesting solution for resolving a conflict between partners at an early stage. Conciliation and mediation are among the most effective conventional solutions for resolving disputes.

It protects the company’s interests by avoiding the publicity surrounding a court case. Mediation also avoids informing the company’s employees. It is often a lack of trust or a failure to communicate that is at the root of a conflict between shareholders. Recourse to a mediator, like recourse to a lawyer, can sometimes help to calm and rationalise relations between shareholders. Founding partners put a lot of energy and emotion into setting up a company. The presence of a third party during a conflict between founders provides the necessary calm and objectivity.

Mediation, arbitration and conciliation are widely used alternative dispute resolution methods. They protect the company’s interests and offer rapid solutions.

Legal procedures for resolving disputes between shareholders

Unfortunately, mediation can also fail or be unfeasible for one of the parties. In such cases, it is advisable to turn to judicial resolution of the conflict between partners. There are a number of possible courses of action, depending on the situation:

• calling a shareholders’ meeting,
• action for abuse of minority rights
• action for abuse of majority,
• injunction to provide information or documents,
• judicial dismissal of the company director,
• appointment of an ad hoc representative,
• dissolution of the company due to disagreement between the shareholders.

Legal action to convene a general meeting of shareholders

A minimum number of shareholders (10% of the shares in an SARL underarticle 223-27 of the Commercial Code) may request that a general meeting be convened. It is possible to apply to the President of the Commercial Court, in summary proceedings, for the appointment of an agent to convene a general meeting in an SAS. This may enable written questions to be asked, to which the directors are required to respond. Of course, such summary proceedings propel the conflict into the public arena, which is not always in the interests of the shareholders or the company. If the president of the court considers that the request is in the company’s interest, he appoints the agent responsible for convening the general meeting.

Appointment of an ad hoc representative

The president of the court appoints an ad hoc trustee who brings the partners together to formalise a settlement agreement. He or she may be responsible for the day-to-day management of the company to prevent it from coming to a standstill. A request to this effect is filed with the competent court. It must specify the scope of the task entrusted to the ad hoc agent.

A request for a management report on a specific point, such as a regulated agreement between a partner and the company, may also be submitted to the president of the commercial court.

Information injunction

Another frequent litigation procedure is the injunction procedure. This is used to obtain disclosure of the legal information that shareholders are required to have.Article L 238-1 of the French Commercial Code provides for a specific injunction procedure.

Action for dismissal of the director

It is always possible to dismiss a company director in all companies. It may or may not require just cause. It may sometimes give rise to the payment of damages in the absence of just cause.

Judicial dismissal of an executive, who is often also a partner, may result from a conflict with the other partners. Any partner in a SARL may therefore request the judicial dismissal of the managing director, whether or not he is a partner. In the case of a simplified joint stock company (SAS), removal by a collective decision of the shareholders poses a problem when the executive is also a majority shareholder.

Action for abuse of minority rights

A minority shareholder can block the operation of the company. Some decisions require an absolute majority or unanimity of shareholders. Remember that a company is formed in the common interest of the partners (article 1833 of the Civil Code). Abuse of minority rights occurs whena partner or minority shareholder blocks a transaction that is essential for the company, with the sole aim of favouring his interests to the detriment of those of the other partners.

Like the abuse of majority rights, the action for abuse of minority rights is a creation of case law. It requires two conditions: a moral element (protecting one’s own interests) and a material element (opposing an essential action). For example, the shareholder’s vote will oppose a decision that affects the survival of the company. Refusing a capital increase that will allow the business to develop without jeopardising its survival is not generally considered to be an abuse of minority rights.

Securing the company’s future after a conflict between founders

The ultimate stage in a conflict between partners is the dissolution of the company due to disagreement between the partners. To avoid reaching this point, there are other options available to managers and shareholders, including selling the business.

In the event of persistent disagreement between the partners, the sale of the entire business is a solution that favours the continuation of the business. However, this is not always an option, and a business law expert should be consulted to ensure that everyone’s interests are protected, as well as the interests of the company and the continuation of the business project. It must be possible to sell the business as quickly as possible to avoid paralysing its operations.

The expertise of Goldwin’s corporate law firm

Maître Bellaiche and her team advise many company directors in Paris on every legal aspect and every contract. Goldwin’s lawyers have developed considerable expertise in all aspects of company law, business law and criminal business law. This enables them to develop appropriate strategies for both advice (drafting articles of association and shareholders’ agreements) and litigation (summary proceedings before the Commercial Court). Our lawyers, all members of the Paris Bar, have a thorough understanding of the challenges facing businesses, particularly those in difficulty.