ADR clause preempts time, cost of shareholder litigation

There are several benefits to including a dispute resolution mechanism within a shareholders’ agreement, says Toronto business lawyer Anton Katz.

“Shareholders’ agreements are very lengthy documents — they can sometimes be 50 pages long — and, as you can imagine, the potential for dispute arises in connection with the various clauses contained within,” says Katz, principal of Anton M. Katz Barrister & Solicitor.

He tells an agreement can be silent on dispute resolution, but if a conflict arises, parties will need to figure it out themselves or face potential litigation.

“If they can’t come to a resolution, they can go to court and commence an action, but that’s costly, time-consuming and uncertain,” Katz says. “The judge may or may not have experience in commercial matters or the industry in which the business is located, so the result may not accord with the expectations of the parties.”

A shareholders’ agreement that spells out how disputes will be resolved pre-empts some of that time, expense and uncertainty, he says.

“A mediation clause requires parties to first attempt to mediate their disputes, typically using a third-party mediator,” Katz says. “You can set out a process for mediations — including an expedited time frame, location, and even identify the potential mediator.”

Parties can avail themselves of mediation, which is non-binding but typically less costly than arbitration, he says.

Mediation may achieve the requisite results, but the agreement can go on to provide that if the matter is not successfully mediated that it’s to be arbitrated.

“Arbitration is binding, and you can pre-select the arbitrator or indicate that it should be someone with specific industry experience or whatever the case may be,” Katz says. “That way, you get specialized expertise. The arbitrator’s decision is final and binding, so there is the benefit of certainty which you would not necessarily get from going to court where there are appeals processes in place.”

He says arbitration clauses will sometimes state that the matter should go before a panel of three arbitrators, although that isn’t really warranted for all but the very largest corporations.

“In most cases, a single arbitrator is best. The agreement can specify where the arbitration is to be held, the time periods can be set out, and it could specify who will pay for it,” Katz says.

Mediation and arbitration clauses also ensure the privacy of a corporation’s affairs and trade secrets, he notes.

“Otherwise, your competitors can get access to public court files and possibly come across competitive information,” Katz says.

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