Shareholder arbitration is a mechanism that permits parties to resolve shareholder-related disputes. Arbitration of shareholder disputes allows parties to resolve their conflicts outside of courts, using neutral arbitration, in an efficient and confidential way. There is a wide range of disputes that emerge between shareholders and between shareholders and the company, including disputes related to:
- breaches of fiduciary duties;
- the valuation of executive compensation, dividends or shares;
- shareholder voting rights;
- termination of shareholder agreements;
- minority shareholder squeeze-outs;
- shareholders harming each other’s interests;
- disagreements on the company’s future direction; and
- disputes related to mergers and acquisitions.[1]
An in-court settlement of shareholder disputes can be long and disruptive.[2] In many circumstances, submitting such disputes to arbitration might benefit the parties.
While the arbitration of shareholder disputes is widely embraced in jurisdictions like the United States, Brazil, and Singapore, their arbitrability varies around the globe.
The Benefits of Shareholder Arbitration
Neutral Forum and Laws
A significant benefit of arbitration is that the parties can select a neutral forum for their dispute. Consequently, in disputes concerning several companies in different jurisdictions, arbitration can be brought in a single forum rather than multiple fora.[3] This permits the parties to resolve their dispute efficiently, reducing the risk of conflicting judgments. Parties may also choose the law applicable to the merits of their dispute.[4]
Confidentiality
Arbitration proceedings are typically private and confidential, which is essential for shareholder disputes, many of which involve a highly personal element. Arbitrating such disputes eliminates the risk of publicly airing embarrassing or highly sensitive information, which could cause reputational damage to the shareholders and the company alike.[5]
Valuation Experts
Party-appointed experts are the norm in international arbitration, as opposed to court-appointed experts commonly used in civil law jurisdictions.[6] Consequently, a shareholder can select its own expert who possesses the particular skills required by the shareholder. Considering that the valuation of shares is crucial to the merits and quantum of many shareholder disputes,[7] the possibility of selecting an expert witness is an important benefit for a party involved in a shareholder dispute.
Flexibility, Finality and Enforceability
Arbitration offers more flexibility than court proceedings in several vital ways. The parties to a dispute can select the arbitrator or arbitrators to adjudicate their disputes. Thus, the parties can select an arbitrator who is experienced in the field in question and has the skills and qualifications to resolve the parties’ disputes.[8] The parties also can adjust the procedure, including the procedural timetable and the number of submissions, to suit their needs.[9]
Unlike litigation, arbitration does not involve the spectre of successive appeals.[10] On the contrary, once an arbitral award is rendered, it is final and enforceable. Furthermore, through the application of the New York Convention, valid arbitral awards are enforceable in 172 countries.[11]
Arbitrability of Shareholder Disputes
While the arbitration of shareholder disputes can provide parties with significant benefits, it might not be possible in a small portion of cases. In some jurisdictions, corporate disputes are considered not arbitrable, i.e., incapable of being resolved through arbitration.
United States
In the United States, the laws are generally in favour of arbitration of shareholder disputes. In Delaware, it is accepted that companies are free to select the forum for the settlement of intra-entity disputes:
if boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes[12]
The US District Court for the Northern District of California in Galavitz v Berg also held that an arbitration agreement will be binding on the shareholders if it is adopted by a majority of shareholders:
Certainly were a majority of shareholders to approve such a charter amendment, the arguments for treating the venue provision like those in commercial contracts would be much stronger, even in the case of a plaintiff shareholder who had personally voted against the amendment[13]
Brazil
Brazil’s approach to the arbitrability of shareholder disputes is clearly established in its Law 6.404 of 15 December 1976 on Joint Stock Companies, which stipulates that shareholders are free to arbitrate their disputes if the corporation’s bylaws provide for such solution:
The corporation’s bylaws may establish that any disputes between the shareholders and the corporation, or between the majority shareholders and the minority shareholders may be resolved by arbitration under the terms specified by it.[14]
India
India’s position on the arbitrability of shareholder disputes is not as straightforward as in Brazil. In the determination of the arbitrability of a dispute, the courts focus on the nature of the dispute and give due consideration to the provisions of the Companies Act to ensure that a reference to arbitration does not strip the parties of their statutory protections. Consequently, claims related to the oppression of minority shareholders and mismanagement are not arbitrable in India.[15]
Conclusion
Shareholder arbitration provides an efficient, flexible, and confidential alternative to litigation. By allowing parties to select neutral forums, applicable laws, and specialized experts, arbitration ensures tailored solutions that meet the specific needs of the disputing parties. While its benefits are widely recognized in jurisdictions like the US and Brazil, the arbitrability of shareholder disputes depends on local laws and the nature of the conflict, as seen in India’s cautious approach. As businesses continue to operate across jurisdictions, arbitration remains a valuable tool for addressing shareholder disputes effectively while protecting sensitive information.
[1] A. Dowling-Hussey BL, C. Needham BL, “Alternative Dispute Resolution: An Effective Route for Shareholder Rights”, The Law Library of the Bar of Ireland, 26 February 2024; K. Schumacher, M. Wabnitz, G. Taylor, “M&A and Shareholder Arbitrations”, Global Arbitration Review, 21 June 2024.
[2] A. Dowling-Hussey BL, C. Needham BL, “Alternative Dispute Resolution: An Effective Route for Shareholder Rights”, The Law Library of the Bar of Ireland, 26 February 2024.
[3] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 15 of the PDF.
[4] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 15 of the PDF.
[5] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 14 of the PDF.
[6] Expert Evidence in International Arbitration, Aceris Law LLC, 27 March 2022.
[7] K. Schumacher, M. Wabnitz, G. Taylor, “M&A and Shareholder Arbitrations”, Global Arbitration Review, 21 June 2024.
[8] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 15 of the PDF.
[9] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 15 of the PDF.
[10] A. Monichino QC, “Arbitration of Shareholder and Trust Disputes”, ANZRIArbMedr (2021) 40, 76, p. 15 of the PDF.
[11] List of Contracting States to the New York Convention, 15 November 2024.
[12] In Re Revlon Inc., Consol. C.A. No. 4578-VCL, 16 March 2010, p. 40 of the PDF.
[13] Galaviz v Berg, 763 F. Supp. 2d 1170, 3 January 2011, p. 7 of the PDF.
[14] Law 6.404 of 15 December 1976 on Joint Stock Companies, Article 109.I.1.
[15] A. Berry, A. Bhan, M. Rohatgi, “Arbitrability of Shareholder Disputes in India: Complexities and Issues”, Global Arbitration Review, 26 May 2023.