Fareya Azfar

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Shareholders Disputes: Common Causes and Protective Measures

Shareholders Disputes: Common Causes and Protective Measures

Shareholder litigation is very common.

Shareholder dispute claims are typically classified as either dissenting shareholder actions or minority oppression actions. Some of the most common events triggering shareholder disputes include:

  • Deceptive practices
  • Diversion of income
  • Involuntary dissolution of a business
  • Non-payment of distributions
  • Breach of contract.
  • not invited to general meetings or otherwise squeezed out of management anticipation
  • allotments of share For no discernible purpose or otherwise resulting in unfair dilution of minority share value
  • a failure to consult the complainant or to provide information;
  • misappropriation of company business or assets;
  • mismanagement of internal company affairs;
  • failure to pay reasonable dividends.

Protective measures

Shareholders in private companies often endeavour to protect themselves from future abuses and oppressions through shareholder’s agreement.

Theoretically, shareholders who feel stiffled by their majority counterparts or the management of the company have many statutory protections which provide a vast array of remedies.

―it would be impossible and wholly undesirable to define the circumstances in which the application of equitable principles might make it unjust or inequitable (or unfair) for a party to insist on legal rights or to exercise them in a particular way ― 

Lord Hoffmann in O‘Neill vs Phillips, (1999) 2 BCLC 1

Ex-ante protections

Minority shareholders can seek to protect themselves against misuses of majority rule by bargaining for express protections in the articles of association or in separate shareholders’ agreements.

With experience, many shareholders disputes become identifiable as recurring instances. With our advice, shareholders can contemplate and agree in advance how the business will be conducted and conflicts will be resolved in future, and seek to anticipate and address likely problems insofar as these can be foreseen.

Carefully drafted incorporation agreements, partnership agreements, articles of association, and shareholder agreements can go a long way towards avoiding problems. Some of the rights that could be protected ex-ante in your shareholders’ agreement are:

  • preemption rights
  • tag-along rights
  • observer rights 
  • entrenchment of management
  • reserved matters, veto rights
  • information rights

Ex-ante contracting even addresses detailed exit provisions giving rise to a contractual right to exit on fair terms in defined events.

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Reviewing existing contracts could tackle three business challenges

Reviewing existing contracts could tackle three business challenges

Introduction

This article is my expression of advice to all businesses to take a meaningful look into the health of their existing contracts and business relationships. My other advice is for businesses not to take this exercise as a step towards transformation, but to understand that at this time, a contract health check is an affordable and doable means of their survival. 

Three specific aspects of ‘contract audit’

First of all, this type of “legal audit” or ‘contract health check’ will indeed reveal where they truly stand in their existing contractual partnerships, business relationships.

It will take a detached snapshot of the monetization they can expect from existing contracts; if neither of the contracting parties does anything to improve or deteriorate the existing dynamic relationship, what type of monetization can be expected from the existing contract, as it is. 

If you identify a particular situation, which you know is bound to become an issue later, proactively addressing it will better enable you to renegotiate contract terms or discuss mutual concessions or allowances. 

Since we are all in the same boat right now, demonstrating this kind of insight and productive attitude towards your existing contractual duties will only strengthen your business relationships. The level of transparency and collaboration needed at the moment to preserve existing businesses in this market cannot come to exist without an up-close, case-by-case legal, technical and otherwise meaningful appraisal of those business relationships. 

If contractual obligations cannot be met, it is essential to maintain open lines of communication.

The second and more action-oriented approach to contract auditing is to identify contract value leakages.

Briefly put, the notion maps the value of a contract at three specific points in a contract’s lifetime. 

  1. The value captured during procurement “Value Promised.”
  2. The business case “Value Expected.”
  3. The value actually delivered by the contract “Value Realized.”

There is thoroughly documented evidence that the Value Realized reduces to 80% of the contract’s Value Promised. 

About 12% of loss in value is attributed to hard leakages, i.e. such as invoicing errors, unrealized pricing or work scoping adjustments, and non-compliance with obligations. The remaining 8% loss is caused by the company’s inferior business management capabilities, for example, poor customer experience, losing renewal opportunities, and inability to retain clients.

Typically, the generally identified sources of leakages are identified to be a result of: 

  1. Poor contract quality; 
  2. the high cost of contracting; and 
  3. inadequate contract management. 

When I first started talking about contract value leakages two years ago, I took an “all in or no-win” position to how companies must plug the leakages. At that time, my motive was for businesses to capture sustainable long-term contract management benefits, both monetary and non-monetary.

But as I said in the beginning, I am not talking about spurring a transformation anymore. I am talking about embracing contract management for its use in a crisis management context. For present purposes, businesses do not need to venture into some ambitious overhaul of their contract management systems (as much as businesses clearly need it.)

For now, any business prompted to implement a contract performance management plan by its working capital needs or other immediate concerns will be wise to start by prioritizing those aspects of contract management that will reap benefits in the short-run.  

Following a systematic contract performance review, businesses almost always are incited to make deliberate and planned collection efforts – because there will be collectables. Of course, it’s important to be creative in how you will actually go about making those recoveries. Proactive intervention and regular contact with contracting parties and business partners will be critical here.

In my view, a priority-based approach to embracing and implementing contract performance management should first target contract value leakages caused by inadequate contract management and focus only on correcting instances of hard-leakages. 

This means that building a single contact repository, creating contract playbooks, standard terms, and templates would not be an immediate priority. Nor will the businesses attend to creating processes or building the culture, work ethics, and soft skills needed to tap the opportunities they lose from the soft leakages (poor customer experience, inability to retain clients etc.)

The third aspect of the contract audit will be related to the pandemic’s direct impact on a company’s legal exposure, risks, and liability. Addressing this element of the contract audit is where businesses may have to explore unique legal positions under the laws of frustration, force majeure and ‘mistake of contract’. 

If the ‘contract audit identifies any such threat’, the particular situation will become a matter for early legal assessment, followed by a concrete strategy and action plan. 

Starting parameters of the audit scope

For example, a shipping company can initiate a contract health check or legal audit by pulling out all of its:

  1. active charter parties for hire collections, payments or rate adjustments related issues. 
  2. shipbuilding, sale and purchase agreements, loans and mortgage documents for upcoming financial commitments and related mutual obligations. 
  3. Any joint ventures, alliances and investment agreements it may have with strategic partners for any renegotiations or actions needed to protect these ventures. 

Similarly, contract performance review by other businesses such as construction companies, real estate developers, oil exploration and drilling companies will be of similar volume and limited to core types of transaction documents. 

I think a contract audit of this scale would be a fantastic start to adopting the holistic and integrative contract management framework. 

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Fixing Contract Value Leakages: a massive opportunity to increase revenue this year.

Fixing Contract Value Leakages: a massive opportunity to increase revenue this year.

Every business transaction creates a strategic partnership, whether this is a contract with a supplier or a customer. A strategic partnership is a recognized union of two parties that establishes rights and obligations between them.

I often compare business partnerships to marriage. Consider entering into a marriage without the knowledge and understanding of the promises you have made to your partner and the promises your partner has made to you.

If lawyers and consultants are akin to vow writing service providers; you may consider seeking their help to articulate your thoughts into words, but is it conceivable that you enter into a marriage based on mutual intentions and promises determined entirely by a third party, and unbeknown to you?

Did not think so.

Yet, you do just that in your business relationships when you turn over the formation and implementation of business contracts entirely to lawyers and managers. 

Food for thought

We are all struggling to maintain stakeholder returns and profitability in current economic times.

Yet we are losing roughly 17% to 40% of the value on our typical contract – from the time of execution to the close-out date. The main sources of value leaks are 1. disagreements over contract scope; 2. failures due to over-commitment; 3. weaknesses in contract change management; and 4. performance issues due to disagreement over what was committed.

In this blog, we share solutions that can help increase revenue from contracts.

A massive boost to bottom-line figures can well be achieved by focusing on an often neglected discipline: Contract Management. Good contract development and management could improve your business profitability by the equivalent of a massive 9% of annual revenue.

Symptoms of Contract Value Leakage

  1. missed expiration dates or deadlines.
  2. serving outside the scope of agreed obligations.
  3. not knowing and utilizing their rights either timely or at all.
  4. not adjusting price, scope creeping
  5. time spent on non-value adding activities 

FIRST Understand the Contract because you don’t

Contract language expresses the intent of the parties, but many times one party or both parties don’t even know what the contract says. The contract lays out a framework, but it is people who actually assure that it comes to fruition. Relationships, not contracts, produce meaningful results.

THEN, Create Contract Playbooks 

Start with the simple, thought profound project, improving the quality of contract templates.

You will need a separate playbook for each contract type: think of key vendors, customers, partners, contractors, and employees. A contract playbook is a playful and creative term for a spreadsheet that breaks down the company’s standard contract terms in four to six columns:

  1. contains the standard clause language
  2. meaning and purpose of the clause/ language
  3. common anticipated objections from the other party.  
  4. alternative language for the clause that is otherwise acceptable to the company. 

For example, your standard governing law preference is Dubai, United Arab Emirates, but your clients may object to that option, particularly those outside the UAE. So, for fall back, you might add that you will accept DIFC law in the UAE, and the laws of England or Singapore outside the UAE. 

You might alert the playbook user that if the client responds to fall back options, the company must go to the legal department or a contract approval committee. This is called the escalation process.

The playbook would develop contract quality more systemically and prevent it from being eroded in the negotiation process.

Post-Award Phase

Just because the contract is signed, it does not mean that the work is done and the negotiation has ended. The organization must ensure those contract responsibilities, benchmarks, and expectations are fulfilled. All of this needs consistency and a high degree of commitment to settle all claims and conflicts, and comply with terms and conditions.

Without a well-functioning system, it’s easy to miss a crucial contractual responsibility essential to both parties. The agreement’s post-award period is just as important. You have a signed contract and commitments at this stage and must comply and behave on contract terms.

Contract Orientation

Begin with a post-award presentation to take note of the rights and obligations of each party. Consider adding flowcharts and graphs – visuals are always helpful for creating understanding.

Contract Administration

Contract administration is necessary to successful management of:

  • compliance of terms and conditions
  • contract restructuring needs
  • contract milestones including payments
  • expirations and renewals
  • service delivery requirements
  • disputes, and claims

Go a step further and leverage technology

  1. A playbook is a dynamic document that requires continuous updates. Leverage technology to maintain deviation trackers to monitor the change of policies/regulations/business strategies, and publish updated versions to all ‘concerned.’
  2. Get an online contract repository – the single source of truth.
  3. If you cannot retrieve it, why retain it? Contracts must be stored in one place, have master templates and allow for quick retrieval and limited-time retention after project closure.
  4. consider taking baby steps towards contract management solutions generating additional value through mining contract data. Machine learning and AI help in the identification and analysis of clauses and other data. AI can pull out previously unseen patterns and relationships, identify anomalies, and optimisation.

The purpose here is to raise awareness and provide food for thought to all corporate leaders to do something about these issues and explore opportunities to increase bottom-line performance.

Where to begin?

Have you done any analysis around value leakage? Ever? This is an ongoing mental exercise. This is not a delegable exercise. The stakeholders themselves know best the source and extent of value leakage. Reflect on your past experiences. Examine company experiences on what has caused problems?

Let’s say you have decided to do something about the loss of contract value. Start with the playbook. Consider what contracts do you want to include in this playbook? Start with the simplest standard contract, for example, a Non-Disclosure Agreement?

Who is the playbook for? Consider your audience to be the business, in particular, the sales or business procurement teams. You are the audience of your first playbook. Hence, you must keep the playbook relatively short and written in a way that the business-savvy can understand. 

How and why to use it? For a contract playbook to be effective, consider annual or intermittent training. The purpose of the business training is to get users of the contracts familiar with basic legal concepts and the “what” and the “why” of the company’s positions on different clauses in the contract. 

Where will you store the playbooks and standard clauses? Consider how your company contracts are stored and managed after signing. Consider a repository. Store the master playbook online. Sometimes contract value leakage may be due to difficulties in finding the contract, not having access to the contracts, or having multiple versions of a contract that have a lot of amendments making it difficult to read the contract and understand your obligations.

The reality is that successful alliances don’t just happen. Board members are good at the start-up phase of contracts but then step back and leave the execution and management to others. The Board will have an important role to play in making sure companies are systematically optimizing contracts.

It is critical that senior executives remain involved in oversight of the partnership.

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