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-      Jayakumar Soundarrajan, FCS, Chennai

If the issue is not resolved at that early stage and the shareholders initiate proceedings, the full range of ODR methods are available. ODR methods, such as mediation, offer parties to a dispute the opportunity to resolve their issues before potentially significant legal costs are incurred – a commercial incentive which applies just as much to shareholder actions as it does to other forms of commercial dispute, including claims between shareholders. ADR is also now firmly embedded in the court procedure but for some national courts, with a default position that parties to any form of commercial litigation are expected to attempt ADR or ODR at an early stage. As a result, all the indications are that ADR or ODR is not only a viable alternative to litigating shareholder disputes; it is also an established step in the litigation process.

In shareholder disputes involving public companies, there typically is no formal ADR or ODR mechanism that the parties must follow. Instead, the parties will have to decide what form of ADR or ODR, if any, makes sense in the context of a particular dispute. In a claim for damages, mediation is still the preferred form of ADR or Online Mediation of ODR. In a dispute with shareholder activists, the most effective form of ADR/ODR may be a face-to-face meeting between the principals. Privately-held companies, in contrast, have more flexibility to address ADR/ODR issues up front. Many privately-held companies now include ADR/ODR provisions in their key agreements that range from mandatory arbitration to requiring an aggrieved party to meet and confer with the other side before filing suit. There are still several cases recently where the parties used this pre-dispute process to settle their differences before a lawsuit was filed.

Shareholder disputes we see in the activist space generally result from disagreements as to commercial and business decisions of how the company is being run, rather than specific legal claims relating to management or director misconduct. While allegations of breaches of board fiduciary and other duties and management failures are common assertions by activist holders, rarely are such breaches so clear cut that a shareholder chooses to have them decided as a matter of law. Rather, the objective behind publically raising the disputes, if not successful ‘voluntary’ change by the company, is to convince fellow shareholders of the weight of its claims and, ultimately their proxy. As a result, whether or not ultimately resulting in an actual proxy solicitation, neither the court no other arbitration forums are relied upon on a regular basis.

ADR/ODR is regularly considered in shareholder disputes although this often occurs at a later, post-disclosure stage. ADR/ODR throws up interesting challenges in shareholder disputes. High-profile claims are often pursued by various action groups and the expectations of a one group of investors may differ greatly from those of another group. Some claimant groups may remain engaged or invested in a company and their interest may include steps to achieve proper future governance and disclosure. For other groups, who have sold their investments, settlement may be purely financial in terms of recovering the loss in share price. ADR/ODR is, of course, no stranger to multiparty disputes, but shareholder disputes regularly require a more complex and structured approach to any form of resolution.