Minority shareholders - beware of arbitration clauses

Further to my previous post on this subject the Court of Appeal have upheld the decision in Fulham Football Club (1987) Ltd -v- Richards and confirmed that arbitration clauses in shareholder agreements will be enforced.  Arbitration is an effective way of resolving disputes but minority shareholders in particular should be wary of agreeing to an arbitration clause in a shareholders agreement.

Arbitration is a private process.  The key things to note in this respect are:

• There is an overall legal framework (the Arbitration Act) within which arbitrations operate but this effectively a default provision;
• Within this parties are free to set their own procedures / choose their own arbitrator;
• What this means in practice is that parties will normally go to an organisation which provides arbitration services who have established rules and procedures and a panel of arbitrators to choose from;
• The parties will need to pay the organisation for their services and also the fees of the arbitrator.

In theory you can adopt a procedure that will be quicker and cheaper than court proceedings, which, together with the fact that arbitration is a private process and not reported to the outside world, can make arbitration look like an attractive option.

However, in practice arbitrations often tend to slavishly follow court procedure with the result that they are as expensive or more expensive than court proceedings.  In addition, without a robust arbitrator there can often be more scope for the parties to delay matters unless a very rigid timetable (which can cause its own problems) is agreed at the outset.

In addition, many arbitration procedures are designed for multi-million, multi-party international disputes.  This may not be obvious from the proposed arbitration clause itself.  The clause may simply say that any disputes are to be decided by arbitration organised by and under the rules of ABC organisation.  What this does not tell you is that ABC organisation is based abroad, has a very complicated procedure, normally requires a panel of 3 arbitrators to be appointed and requires the parties to deposit a large sum of money before any arbitration commences.

If such a clause was adopted then power would very much vest in the party with the deepest pockets.  Whilst this is still the case in court proceedings, the initial costs of launching a petition under s.994 are not prohibitive.  However, the costs of getting an arbitration of this type off the ground can be beyond the power of all but the very wealthy.

A minority shareholder, who may have been excluded from the company and from the ability to earn any money from the company is therefore likely to be at a significant disadvantage.

The moral of this story is beware of majority shareholders bearing gifts.  If as a minority shareholder you are asked to sign up to an arbitration clause on the basis that this is the best way to resolve any disputes that arise then be absolutely clear what you are letting yourself in for.  If you discover that you ultimately cannot afford to go to arbitration the court will not help you out.

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1. Boardroom Disputes » Supreme Court upholds rights of shareholders to arbitrate — March 9, 2012 @ 9:40 am

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