The role of a company’s auditors and accountants in shareholders disputes

A company’s accountants and auditors often play a key role in the business of smaller companies, acting as general advisers to the directors.  This can lead to problems in the event of a shareholder dispute or boardoom battle.

First, there will be an inclination to side with the majority shareholders in any dispute as they ultimately control the company.  Any firm of accountants looking at the longer term will have to take into account that backing the wrong horse could lose them the business of acting for the company.  For smaller firms of accountants this can be a significant factor.

Even where the accountants act even handedly and remain neutral in a dispute there will often be an intense distrust on the part of some shareholders (typically the minority shareholders).  This can introduce an additional element into the dispute and the parties end up arguing about the veracity of any accounts or whether or not new accountants should be appointed.  This can make a complex dispute even more convoluted and hence difficult to resolve.

In this context it is unfortunate that shareholders agreement often make the company’s accountants or auditors either the arbiter of any dispute (via an expert determination clause) or the valuer who determines the value of shares on a transfer between shareholders (whether voluntary or forced).  Where there is distrust about the neutrality of the accountant then the operation of such provisions can be fraught with problems.  The parties can end up arguing about the dispute resolution or valuation process itself.

Such a situation arises from the best of intentions - to find a cost effective way to resolve disputes, especially about value.  The company’s accountants / auditors are an obvious choice, they know all about the company and the shareholders and should be able to come to a swift and accurate decision.  However, in light of the problems I have highlighted it can sometimes be a false economy.

In addition, general accountants may not have the forensic skills of experience to properly value a company in a contentious situation and may be be completely out of their depth when asked to step into the middle of a serious boardroom bloodbath and reach a binding decision on a particular aspect.

A better approach, especially in more valuable companies where there is potentially more to argue about is to give the valuation or expert determination role to a third party.

In relation to valuation, a clause can be drafted which requires the parties to agree the identity of such a valuer, failing which the valuer is to be appointed by the President for the time being of the Institute of Chartered Accountants for England & Wales.

With regard to resolution of disputes, serious consideration should be given to whether or not expert determination is an appropriate way to resolve what can be very complex disputes and, if it is, serious thought should be given to the identity of the expert.  Choosing the company’s accountant / auditor is unlikely to be the best choice.

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