Resolving Shareholder Disputes (Series: Common Commercial Conflicts)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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Thank You To Our Sponsor

MEET THE FACULTY
Moderator:
Leland Chait – Leland Chait Esq.
Panelists:
Shawn Fox – Sikich LLP
Rebecca Hume – Kobre & Kim LLP
Mitch Cohen – Bronswick Benjamin
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ABOUT THIS WEBINAR:
Resolving Shareholder Disputes
When business owners come to the point where they simply can’t see eye to eye, success
can become unfeasible. Disputes between business owners can arise from any number of
issues and have varying impacts on the actual business, ranging from simple distraction
to total dissolution. Depending on the business and circumstance, the means for resolution
may or may not be provided for in the relevant by-laws or shareholder agreement. In this
webinar, the expert panel discusses different types of shareholder disputes and
corresponding remedies, including alternative dispute resolution, buy-sell agreement
provisions, and share valuation considerations.
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ABOUT THIS SERIES:
Common Commercial Conflicts
This webinar series focuses on the legal and financial realities that accompany
unanticipated adverse events, soured business relationships, and failing
organizations. Whether you are a general litigator, business owner, aspiring
shareholder, or insurance claims analyst, this webinar series will help you to
understand and prioritize key concepts associated with business breakups,
shareholder disputes, claims for lost profits, and bankruptcy avoidance actions.
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EPISODES IN THIS SERIES
2/05/19 Episode #1:
Common Issues and Strategies in Business Breakups
2/26/19 Episode #2:
Nuts & Bolts of Lost Profit Cases
3/26/19 Episode #3:
4/23/19 Episode #4:
Defending Against Bankruptcy Avoidance Actions
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #3:
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REASONS FOR SHAREHOLDER DISPUTES
⚫ Breach of Fiduciary Duty
➔ A breach of duty occurs when one person or company has a duty of
care toward another person or company, but fails to live up to that
standard. A person may be liable for negligence in a personal injury case if
his breach of duty caused another person’s injuries.
⚫ Breach of Contract
➔ A breach of contract is a failure to perform the terms of a contract to the
extent that it renders the agreement "irreparably broken" and defeats the
purpose of making the contract in the first place. The breach must go to the
very root of the agreement between the parties.
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(cont'd)
⚫ Fraud
➔ An intentional misrepresentation of material existing fact made by one person
to another with knowledge of its falsity and for the purpose of inducing the
other person to act, and upon which the other person relies with resulting
injury or damage.
⚫ Self-dealing
➔ The conduct of an officer, trustee, an attorney, or other fiduciary that consists
of taking advantage of his or her position in a transaction and acting for his or
her own interests rather than for the interests of the shareholders of the
company, or his or her clients.
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(cont'd)
⚫ Perceived Inequity (including compensation, duties)
➔ A perception that compensations, responsibilities or dedication/involvement in
the business is not equal, which may cause discord among the shareholders.
⚫ Conflict of Interest
➔ A term used to describe the situation in which a public official or fiduciary who, c
ontrary to the obligation and absolute duty to
act for the benefit of the public or a designated individual, exploits the relationshi
p for personal benefit, typically pecuniary.
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(cont'd)
⚫ Financial
➔ The company may be struggling financially or growing exponentially, which cause
distress and discord among shareholders.
⚫ Operational or Managerial {direction or growth (or lack) of the business}
➔ Shareholders may disagree on vision or direction of the company.
⚫ Differing Personalities
➔ Shareholders may not have personalities that work well together. One
shareholder may have a stronger (or weaker) personality than another, which
causes disagreement and imbalance among the owners.
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REASONS FOR SHAREHOLDER DISPUTES: A UK AND
OFFSHORE PERSPECTIVE (cont’d)
• Concentration of power and control in voting majorities and
directors creates scope for abuse and leads to:
• Directors acting ultra vires or in breach of their duties in
particular fiduciary duty and duty not to make a secret profit or
put him/herself into a position where his/her interests conflicts
with duty owed to the company.
• Failure to effectively concentrate power and control leading to
practical deadlock – common in joint ventures

MAJORITY CONTROL
⚫ Can lead to claims of:
➔ Oppression
➔ Self-dealing, misappropriation
⚫ Risks of conventional corporate law norms
➔ Centralized control in board
➔ Majority control in voting directors
➔ May take actions detrimental to minority
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SHAREHOLDER OPPRESSION
⚫ Squeeze-out or freeze outs
➔ Exclusion from profits
➔ Lack of dividend policy or declaration
➔ Lack of profitability due to excessive director fees, officers’ compensation,
bonuses
⚫ Terminating employment
➔ Involuntary removal from director or officer position
➔ Diminish voting powers
➔ Deny access to information or documents
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SHAREHOLDER CLAIMS: UK & OFFSHORE PERSPECTIVE
• Personal claims: right to enforce rights under articles (by-laws); right to
object to improper alteration of articles; right to bring an action to prevent a
proposed ultra vires transaction i.e one outside the power of the company or its
directors; and enforcement of contractual rights under a shareholders
agreement.
• Claim belonging to the Company: where the wrongdoers are in control and
the wrongdoing amounts to an equitable fraud shareholders may be able to
bring a claim in the name of the company – a derivative action.

SHAREHOLDER CLAIMS: UK & OFFSHORE PERSPECTIVE
(Cont’d)
• Section 994 Petition (UK only); “unfair prejudice” petition where company
property has been misapplied or there is mismanagement or a failure to pay
reasonable dividends or an improper allotment of shares and rights issues.
• Just & Equitable Winding Up: presentation of a winding up petition on the just
and equitable basis where the relationship has hit rock bottom, e.g. minority
shareholder has been excluded from management, majority have consistently ignored
the rights of the minority, or directors have awarded themselves excessive
remuneration or a JVD where there is deadlock and no decisions can be made.
• In both cases relief that can be granted is very wide - includes purchase of
complainant’s shares by the wrongdoer.

RESOLVING SHAREHOLDER
DISPUTES
⚫ Mediation
⚫ Arbitration
⚫ Litigation
⚫ Alternative Remedies
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MEDIATION
⚫ Settlement discussions guided by expert.
⚫ Pros and Cons:
➔ Vary depending on jurisdiction
➔ Third-party mediator may be more experienced in particular matter more than judge
➔ May maintain relationship between parties
➔ Cost
➔ Time
➔ Outcome is not enforceable except if reduced to agreement
➔ Mediator does not render a decision of any kind
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ARBITRATION
⚫ Adversarial mechanism where dispute decided by third part(ies).
⚫ Pros and Cons:
➔ Third-party arbitrator may have more experience than a judge in particular matter
➔ Decision is binding between parties and enforceable (if reduced to judgment in court)
➔ Cost/time benefit
➔ Procedures what parties agree to – streamlined procedures (less due process) – less
fairness v. cost and time savings
➔ Decision may be “unfair” to one party
➔ Decision may not be appealed
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ARBITRATION: OFFSHORE PERSPECTIVE
• Most disputes in the Cayman Islands and BVI are international so
governed by the ICC Rules of Arbitration and the seat of the
arbitration is NY, London or elsewhere.
• However, where there are allegations of numerous serious breaches
of contract and statutory duties giving rise to a justifiable loss of
trust and confidence shareholders can pursue a just and equitable
petition notwithstanding an arbitration clause.

LITITGATION
⚫ Formal Dispute Resolution Process
⚫ Pros and Cons:
➔ Enforceable
➔ Due Process = fairness to all
➔ Seeks the most equitable outcome
➔ Decision may be appealed
➔ Time consuming process
➔ Public -- May damage goodwill and image of company
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ALTERNATIVE MECHANISMS
⚫ Compel buy-out
⚫ Appoint provisional directors
⚫ Appoint custodian
⚫ Other equitable remedies
⚫ Dissolution rare
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THINKING AHEAD: DEALING WITH
POTENTIAL FRICTION WITH
CONTRACT TERMS
⚫ Contractual agreements when times are good and easy:
➔ Incorporation Agreements
➔ Operating Agreements
➔ Buy-Sell Agreements
➔ Shareholder Agreements
➔ Partnership Agreements
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THINKING AHEAD – PROPHYLACTIC
CONTRACTUAL TERMS (cont'd)
⚫ Contract terms addressing:
➔ Death
➔ Divorce
➔ Disability
➔ Shareholder Dissention
➔ Corporate Dissolution
➔ Shareholder Retirement
➔ Bankruptcy
➔ Decline of Market
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⚫ Anti-squeeze-outs provisions:
➔ Non-competes
➔ Employment contracts
➔ Breach of duty provisions
➔ Dividend triggers
➔ Supermajority provisions
➔ Provision that commits board to specific course of action
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⚫ Sufficient funding vehicles where appropriate
➔ Life insurance
➔ Key man
➔ Disability
➔ Other quickly liquid asset
⚫ Arbitration provision (or absence of provision)
⚫ Venue and choice of law clauses
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STANDARDS OF VALUE
⚫ Fair Market Value
➔ The price at which an asset would change hands between a willing buyer and a
willing seller when the former is not under any compulsion to buy and the latter
is not under any compulsion to sell, both parties are able, as well as willing, to
trade and are well informed about the asset and the market for that asset.
⚫ Fair Value
➔ “The amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s-length transaction” in the International Valuation
Standards, 2007, p. 88 by the International Valuation Standards Council. The
International Financial Reporting Standards (IFRS) uses this same definition.
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STANDARDS OF VALUE (cont'd)
⚫ Book Value
➔ Essentially, the company’s net assets less its net liabilities, as stated on the
company’s financial statements.
⚫ “Value”
➔ A generic term sometimes used in buy-sell agreements or shareholder
agreements that is meant to describe a standard of value to be applied. The
meaning may or may not be clear in definition or description for a valuation
analyst to understand its application. May be a term to describe an agreement’s
stated formula for valuing shares. Sometimes the word “Value” is meant to
describe terms such as Fair Market Value, Fair Value or Book Value.
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VALUATION APPROACHES & METHODS
⚫ Income Approach (going concern)
➔ Discounted Cash Flow (DCF) Method
➔ Capitalization of Earnings Method
⚫ Asset Approach (ex. holding company or unprofitable company)
➔ Adjusted Book Value Method
➔ Excess Earnings Method (hybrid income/asset approach)
➔ Market Approach (sometimes used as a sanity check)
➔ Market Transaction Method (private transactions)
➔ Guideline Publicly-Traded Company Method (public transactions)
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WHY A VALUATION IS ESSENTIAL
⚫ Objective, third-party opinion
⚫ Based on recognized valuation theory and methodology
⚫ Considers whether valuation discounts or premiums are available
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WRITTEN AGREEMENTS
⚫ Funded, reasonable vehicle for transfer of ownership and wealth
⚫ Specified date of trigger, “as of” date
⚫ Valuation formulas that may materially distort the value of the subject equity interest
⚫ Consult with an experienced valuation professional to construct the Agreement to
ensure all issues are addressed
⚫ Update Agreement with advisors and shareholders to ensure
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ABOUT THE FACULTY
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LELAND CHAIT – lelandchait@gmail.com
Leland Chait helps his clients solve problems and protect their interests, including
through efficiently and effectively prosecuting and defending claims and lawsuits
for clients in the insurance and managed care industries, and in handling business
disputes for small to medium-sized businesses. Lee has a record of success in
trying to judgment or other dispositive outcome trial, arbitrations and motions for
temporary restraining orders and for preliminary and permanent injunctive relief.
Lee has been named a “Leading Lawyer” from 2013-2017, and received other,
similar distinctions.
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REBECCA HUME – rebecca.hume@kobrekim.ky
Rebecca Hume focuses her practice on international judgment
enforcement and asset recovery, complex commercial litigation and
insolvency litigation in various offshore jurisdictions. Her extensive
practices covers both the onshore and offshore regions, particularly the
Cayman Islands and the U.K., where she advises clients in disputes
involving private equity and investment funds. She also regularly
advises shareholders and stakeholders in solvent and insolvent
liquidations in the various offshore jurisdictions.
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SHAWN FOX – shawn.fox@sikich.com
Effective as of January 1, 2019, Shawn Fox was promoted to the national managing director of Sikich’s forensic
and valuation services practice. He is based in the Chicago office. He has 22 years of experience providing fraud
and forensic accounting, dispute advisory, and valuation services to the business and legal community involved
in high profile disputes and investigations.
With significant experience in the preparation of expert reports, Shawn assists clients in all phases of complex
litigation, including case assessments, discovery, document review, damages analysis, complex modeling, and
demonstrative exhibits. He has testified in almost 50 different cases at deposition, trial, and arbitration as an
expert witness and has served as a court-appointed receiver. Shawn has been qualified as an expert witness in
federal district and bankruptcy courts and state courts across the U.S. Shawn is also retained as a consultant to
quantify the potential damages or exposures in disputed matters.
Shawn directs forensic investigations and analysis across a wide range of areas, including high-stakes litigation,
complex damages, lost profits, unjust enrichment, economic damages, diminution of value, reasonable royalty,
intellectual property infringement, bad faith, breach of contract, breach of fiduciary duty, misappropriation of
trade secrets, tortious interference, securities, fraud, purchase price disputes/post-acquisition disputes, class
action, and bankruptcy litigation, as well as valuation and insurance claims recoveries.
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MITCHELL M. COHEN – MCohen@bronswick.com
Mitchell M. Cohen is a Certified Public Accountant (CPA), a Certified Fraud Examiner
(CFE) a Forensic Certified Public Accountant (FCPA) and a Certified Forensic Litigation
Consultant (CFLC) with over 28 years of accounting and tax experience. Mr. Cohen is a
Partner with Bronswick Benjamin P.C. a public accounting firm in Chicago, Illinois and has
been with the firm since November 2018. Mr. Cohen’s expertise includes offering expert
guidance in many areas such as strategic business planning, financial negotiation,
accounting system design, personal and corporate tax planning, IRS audits, financial
statement compilations, review and audits in the areas of for-profit, governmental and not-
for-profit entities, manufacturing, distribution, interior design, catering companies and
restaurants among many types of closely held businesses. Mr. Cohen has also conducted
numerous forensic investigations in the areas of divorce, loss of income calculations,
piercing the corporate veil, breach of fiduciary responsibility and conversion. Mr. Cohen is
also a testifying expert witness. Mr. Cohen is the National President of the Forensic Expert
Witness Association.
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QUESTIONS OR COMMENTS?
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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Resolving Shareholder Disputes (Series: Common Commercial Conflicts)

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