This article was originally created for Hayes Knight (now Nexia Auckland).

24 November 2016

Unfortunately, even when everyone acts with the best intentions, conflicts can and do arise in any business. They arise between a business and a customer or supplier, a business and an employee, or often between joint owners of a business. What is genuinely believed to be ‘fair and reasonable’ by one party is often seen as being anything but fair and reasonable by another.

As Chartered Accountants, we are a sounding board for our clients, and often get asked to step in as a relatively independent party to assess the situation when a dispute arises, particularly when it is between business owners.  Having someone look at the issue from the outside, and offer an impartial opinion, can help to push things towards resolution.

We recently assisted with a situation where a shareholder relationship had broken down.  It became apparent that the situation was irreparable and unfortunately there was no shareholders’ agreement in place to spell out what should happen.  Money was owed both to and from shareholders by the company and it soon became apparent that the amounts involved would not easily be agreed upon.  Minor issues that were deemed irrelevant while the shareholder relationship was sound, such as who had the better company vehicle, were suddenly being raised as reasons why one shareholder was owed more than the other.  Financial statements that had previously been approved were now being questioned and the whole situation was spiralling out of control.

Both shareholders had the option of forcing the company into liquidation, which would ultimately resolve everything.  However, when we analysed what would happen in the event of a liquidation, it quickly became apparent that the only person who would benefit out of such an action would be the liquidator.  There was no easy way of determining a 100% correct position, attempting to do so would involve huge amounts of time and cost, and even then, so many judgement calls would need to be made that neither party would agree to the result.

Our approach to this situation was relatively simple.  We made sure that everyone understood that no one was going to be happy with the outcome.  We explained in a logical, scientific way that if either of the parties pushed the company into liquidation, there would be little left to fight about once the bank, liquidator and lawyers had all been paid.   As long as no one was prepared to destroy their own position in order to wound the other party (which unfortunately does happen sometimes), then we could bring things to a resolution by ‘finding a mutual level of dissatisfaction’.  We effectively wanted to broker a deal whereby both parties felt aggrieved, but they could reluctantly live with the outcome.  Getting the parties to adopt this mindset was a huge turning point that then allowed for a swift resolution to be negotiated.

It is an approach that we often recommend when there is no possible way that both parties can get what they want.  We have seen too many examples of the extreme costs incurred when conflicts had to be resolved through liquidators or lawyers.  Often with a little bit of external perspective from an advisor, a solution can be found. However, in more complex situations a professional mediator can be hugely valuable and cost effective.

Our advice when faced with a difficult conflict is to take the following steps:

  • Check what documentation is in place to provide guidance – shareholders agreements, terms of trade or employment contracts, for example
  • Ask the other party what they believe would be a ‘fair and reasonable’ solution.  You may well not agree with it, but at least you’ll know their position.  It may not be as far away from your own position as you think it will be
  • Take a long term view.  Is giving away more than you would like now, and saving a relationship, beneficial to you in the long term?
  • If you can’t accept the other party’s position, embrace the concept of reaching ‘mutual dissatisfaction’.  Either raise this with the other party directly, or if the situation is too heated or emotional, get someone independent involved
  • Don’t take a ‘nuclear option’ (such as appointing a liquidator) without seriously considering what the realistic outcome will be for all stakeholders, and getting reliable independent advice

A lot of conflicts can be resolved very efficiently if appropriate documentation is in place (and fully executed) that sets the ground rules.  Unfortunately, many businesses fail to understand the importance of such documentation until things go wrong.  Take the time now to check shareholders’ agreements, terms of trade and employment agreements, so you have a starting point when you’re next faced with a dispute.

Tristan Dean
Business Advisory Director
T +64 9 414 5444

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This article was originally created for Hayes Knight (now Nexia Auckland).