On 7 March The Sunday Times drew attention to the problems facing Ralph & Russo – not least a financial dispute with shareholder Candy Ventures, owned by Nick Candy.
Often disputes between shareholders in the fashion industry are kept private. But unfortunately for Ralph & Russo, not this one.
Whilst this dispute is financial in origin, common examples of shareholder disputes include:
- disagreements over the direction and development of the underlying business
- deterioration in the relationship between key individuals (sometimes caused by the disparity in the respective effort being invested in the business)
- conflicts over funding and/or dividend distributions.
Where one of the parties (the “Leaver”) decides he/she no longer wishes to work with the other (the “Remaining Shareholder”) there are several consensual and non-consensual ways of resolving the dispute.
The consensual methods include:
- appointing an independent advisor
- negotiating an exit to bridge the valuation gap.
Shareholders may also consider alternative structures, including a buy-out by an external buyer, share buy-backs and setting up a new company.
Recent examples and ways of breaking the deadlock are included here.
Non-consensual methods present more legal challenges, and include compulsory winding-up, a sale of assets or a pre-pack sale.
If a dispute has arisen and parties have been unable to reach a desirable compromise by negotiating directly with each other, mediation should be taken into consideration to resolve, or if possible, narrow the areas of disagreement.
As a neutral and independent person, the mediator will encourage a dialogue and establish a middle ground so that the parties can find an amicable outcome.
Ideally the parties will have a shareholders’ agreement in place with a dispute resolution clause that will set the parameters for mediation. Otherwise, parties could look for a mediator from their professional or social circle; refer to a mediation service provider or, a panel of mediators, who will recommend a shortlist of experts to choose from.
A week before the meeting (in Covid times these would be online), parties are advised to provide the mediator with a concise statement outlining their case, perceived differences, and position. At the meeting, the mediator will attempt to reach a consensus through a combination of private discussions with each party and joint meetings with both sides present. The mediator will use his/her professional knowledge and skills throughout the negotiation, but no final solution will be imposed on the parties.
If a settlement is reached, the terms should be incorporated into a settlement agreement and/or deed of waiver of claims. Often this will be accompanied with share purchase agreements and/or formal employment termination agreements. Agreements reached in mediation can be enforced through the courts.
Submitting to mediation avoids the high costs and stress involved in litigation and allows the parties to keep the dispute confidential and without prejudice. This helps retain the image of the company until a solution can, hopefully, be reached. Mediation might also avoid the division between “winner” and “loser”, commonly seen in litigation, which fosters animosity between the parties and eventually impacts the future of the business.
Appointing an independent adviser
The company may also consider appointing a non-executive director or board adviser to assist in the negotiation process.
Negotiating an exit to bridge the valuation gap
Where the Leaver chooses to sell his/her shares and exit the company, often the parties will find themselves on the opposing sides of a “valuation gap”. The below structures/options can be taken into consideration to bridge such a gap:
- The Leaver may be able to make use of tax exemptions on termination payments. If it is agreed that the Leaver should be compensated for his/her loss of office, a payment may be tax free up to £30,000 (Employer National Insurance contributions will apply to any award in excess of the £30,000 threshold). Legal advice is essential here as the availability of this relief has become increasingly restricted in recent times.
- Ask the company accountant to produce a realistic valuation of the shareholding (although a key question will be whether a discount is applied to reflect any minority discount).
- Review where monies are available from so the buyout could be funded from a mixture of other shareholders; the company itself and/or new investors.
- Consider deferred payment terms (not available if the company purchases its own shares). This may result in discussions with the Leaver about them receiving security to guarantee future payment.
- The Leaver may be eligible for business asset disposal relief, which will allow him/her to claim a favourable capital gains tax rate of 10%. There are several conditions that need to be met to be eligible for this relief and, again, please seek tax advice to check your eligibility.
- Offering a “non-embarrassment clause” in the share purchase agreement. This works to readjust the original sale price of the Leaver’s shares, if the Remaining Shareholder sells the business, at a higher price, within a specified period in the future.
- The Leaver may decide to step back from his/her day-to-day involvement in the business and continue as a sleeping partner. Under such circumstances, the parties may enter into a new shareholders’ agreement (and the Leaver may exit their service agreement) to reflect the new arrangement.
- Alternatively, or in addition, a different class of shares could be agreed between the parties. The Leaver would relinquish rights to his/her ordinary shares, and the parties could agree a class of shares, for example, with no voting rights and no dividend so that the Leaver would only benefit economically if the business is sold or some other realisation event occurs.
In next month’s issue of Fashion Focus we consider some alternative structures which may help disputing shareholders in fashion businesses.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.