Corporate Disputes: How Embedding Dispute Resolution in Charter Documents Can Help
Almost all corporate disputes resemble the core plot of the Mahabharata epic in as much as it is a fight for entitlements between closely related parties.
 
While the epic is rightly revered as a repository of infinite human wisdom laced with a divine touch, the origin of the dispute is that the younger brother was given the throne because his elder brother was considered unfit to rule due to his congenital blindness.
 
The rest of the loops trace back to this fairly binary problem of what the deprived individual and his immediate family deemed as unfair treatment. The end result was that almost the entire humanity that lived between the Himalayas and the Ganges was wiped out. 
 
Personally, any number of readings of the copy I possess since my teens (written by Chakravarti Rajagopalachari or Shri Rajaji) has not helped me to yet decide whether there could be a definitive answer to who was right and who was not and whether all the bloodshed and loss of wealth was justified. 
 
Quite often, we tend to rely on the justification of the divine arbiter at each sticky moment as settling the matter beyond doubt. For me, he is like a very clever lawyer or an astute judge, who can artfully justify his view and make it prevail over all counter-arguments. 
 
Of course, he is the final arbiter of any problem, terrestrial or celestial, and can make and unmake settings and situations and, finally, rewrite the law to justify his judgement! 
 
He is not involved in settling corporate disputes and, hence, the need to heed the danger of emerging views and jurisprudence in corporate conflicts. 
 
There are many that have surfaced over the years between close family members, siblings, partners of many years and generations, financial investors and fellow promoters, private equity, venture capital and institutional investors and, of course, the sovereign, in some cases. 
 
It is not to pretend that this is an unchartered territory waiting to be expounded upon.
 
Nevertheless, each new milestone is a reminder that the business eco system has been slow to incorporate all the learnings of the past and still anchoring in so-called soft aspects like goodwill and trust. 
 
Amity, goodwill, and trust and more is the necessary foundation for all forms of human interaction and most certainly for business relationships. 
 
But, just as in the epic, the prize involved being too alluring, the principles start yielding to power and position. 
 
The cost of a protracted conflict is prohibitive both in terms of the immediate legal costs and the long-term effect on the underlying institution. The task is to visualise as many conceivable disputes that can arise in a particular situation and provide for it. 
 
Since it is natural that families will grow and become bigger anticipating the arrival of more contenders to the offices and ownership is the most basic flexibility that any corporate structure should provide for. 
 
Where for any reason a particular part of the family has to be excluded from the management or even from the shareholding, such carve-outs should be brought out in a way that it can easily fit in a future contingency that currently does not loom on the horizon but may have occurred in a different case. 
 
The major source of disputes in many breakups is the mode of valuing and settling the rights of the exiting part(ies). 
 
The typical clause of professionals being employed to decide the value has more than once come under scanner as the valuation principles make no difference between different situations that may prevail in cases and adopts a straitjacketed formula. 
 
It is not difficult to embed a robust formula that encapsulates the special relationship between the parties and the rights that the co-owners may enjoy beyond just the ownership of a said quantum of shareholdings.
 
Corporate structure may have been a choice of convenience but most business relationships are effectively a partnership. The failure of the judicial system to understand this is the cause of many a bad outcome legally. 
 
The flexibility that a limited liability partnership provides should be evaluated at the stage of set up of a new venture. Even if a corporate form is chosen, the spirit of partnership should be duly evidenced in the charter documents.  
 
Similarly, rights over intangibles can become a major problem in the coming years as most new-age businesses are intangible-heavy.  
 
Succession, and roles and responsibilities need to be thought through thoroughly and this part of the charter document should be periodically revisited and changed as necessary.
 
The idea is not to list out all areas that need attention but to sensitise entrepreneurs and professionals to this facet of corporate management and advice that more than sufficient attention be bestowed not only while setting up but equally at periodic intervals. 
 
It may be a good idea to revisit it every five years and update for change in the environment. Also changes in the law are frequent. Little do people connect change in law to the charter documents. 
 
In fact, very few companies have amended their memorandum of association (MOA) and articles of association (AOA) after the new Companies Act was passed in 2014.
 
Finally, the dispute resolution should ideally avoid courts. Courts in India have definitely come short on the speed in resolution and often on appreciating the nuances of the operations of a business. 
 
The healthier alternative will be to have different layers of resolution process outside the court. If the parties can afford to keep the jurisdiction of dispute settlement outside the country, at least for a near few years, they should.
 
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)  
 
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