According to commercial law attorney, PJ Veldhuizen there is a marked increase in the number of shareholder disputes within the SMME sector in South Africa. Veldhuizen who is a litigator, specialist commercial mediator and arbitrator at Cape-based Gillan and Veldhuizen Incorporated said that it is unfortunate that these matters are not catered for at the onset of the relationship. However, even if these matters have not been dealt with in the memorandum of incorporation or shareholders agreement when they do arise, both parties should elect to submit to a mediation process rather than heading straight to court. In fact, in terms of Rule 41(A) of the High Court Rules, this is prescribed.

Speaking in Cape Town this week, Veldhuizen commented; “The trouble arises when neither shareholder in an SMME has a definitive casting vote or where the rules for decision-making have not been thoroughly canvassed in agreements. Often, a dispute develops into a free-for-all and lands up in extremely costly litigation with one party attempting to interdict the other party from making decisions or unilaterally acting on behalf of the company.”

Starting a business relationship is often an exciting and new process and shareholders may neglect to pay the deserved attention to the drafting of shareholders’ agreements or their Memorandum of Incorporation (MOI). Veldhuizen stresses that a provision must be included on how decision-making is to take place in a company and, if you are unable to reach a decision or agreement on something, how these decisions/disputes should be dealt with. This could mean appointing a mediator or referring the dispute to an expert or professional in the industry relative to the disagreement; i.e.; an accountant, banker, financial advisor, etc.

Unlike any JSE-listed company or large companies, which are generally run by their boards without much recourse to shareholders, the SMME sector’s only route is often in the blunt instrument of the court, explained Veldhuizen. “The problem with taking these matters through the court system,” he says, “is that it is expensive, time-consuming, indefinite and the shareholders or directors are often forced to endure appeal after appeal – any savvy business person simply cannot afford to expend any of the above.”

To curb the unnecessary and often unauthorised spending habits of an errant co-director, Veldhuizen explained, can leave a client with the only option of applying for an urgent interdict. These costs can run into hundreds of thousands of rand.

Shareholder agreements or MOIs are set out to furnish certainty concerning the rights and responsibilities of the company, its shareholders and its directors. An efficient agreement should include a clause that manages and provides a speedy and effective process and solution to control disagreements and disputes which are inevitable in many a business life-cycle. Veldhuizen advises that any parties in a business relationship whether newly formed or matured should revisit and review their agreements and contracts. He points out that contentious themes frequently include retirement mechanisms, banking mandates, the use of business assets, expense and loan account directives and credit card usage.

A contract that covers all business circumstances and includes a sound dispute resolution clause will not only keep you in a harmonious relationship but more importantly keep you out of court when things go wrong.