Introduction to Conflicts Between Business Partners
Effective management of relationships between business partners is essential to ensuring the success and stability of a company. In Italy, conflicts between partners can arise for various reasons, including corporate governance, administration, or profit distribution, jeopardizing the company’s operations and growth. When a dispute arises, commercial litigation can be lengthy, complex, and costly. Therefore, it is crucial to understand the primary causes of these conflicts and adopt appropriate preventive strategies to maintain a harmonious and productive professional environment.
The 10 Most Common Controversies Between Partners
Conflicts in Equal Governance
These arise when two partners hold an equal number of shares (typically 50%) and cannot agree on strategic decisions, leading to a decision-making deadlock. These conflicts are frequent in partnerships and small LLCs, where governance issues are difficult to resolve through majority rule.
Disputes Over Voting Rights
Disagreements regarding the exercise of voting rights, often linked to differing interpretations of company bylaws or shareholder agreements.
Dividend Distribution
Differences regarding the timing and amount of dividend payments, where some partners prefer reinvesting profits while others seek immediate distribution.
Transfer of Shares
Issues related to pre-emption clauses, drag-along, and tag-along rights, which govern the sale and transfer of company shares.
Conflicts of Interest
Situations where a partner acts in their own interest to the detriment of the company or other partners.
Transparency of Information
Lack of access to company data, with minority partners often feeling excluded from essential management information.
Leadership Roles
Disagreements over roles and responsibilities within the company, particularly in the absence of a clear division of tasks.
Equity Valuation
Disputes over company valuation and share prices, especially critical during sales or partner exits.
Strategic Differences
Diverging visions regarding company strategy, long-term goals, or operational methods.
Exclusion of a Partner
Conflicts related to the expulsion of a partner, often due to inappropriate behavior or breaches of company agreements.
Common Causes of Partner Disputes and Their Consequences
- Lack of a Clear Partnership Agreement: The absence of a document outlining rights, duties, and procedures can lead to misunderstandings and conflicts.
- Diverging Business Goals: Contrasting visions for the company’s future can create tensions between partners.
- Partners with Different Financial Objectives
- Lack of Transparency and Communication: Poor information flow can fuel suspicion and misunderstandings.
- Intergenerational Transfer of Shares
- Periods of Crisis or Sudden Economic Growth
Decision-making deadlocks in a company can be dangerous, potentially disrupting operations. If partners frequently argue, stakeholders may notice and start doubting the company’s stability. In severe cases, without a proper resolution, the business can be paralyzed, leading to a loss of asset value and shares, or even company dissolution and, in extreme cases, bankruptcy.
Prevention is Better than Dealing with the Consequences! Strategies to Avoid Litigation
When entering a business partnership, it is essential to remember that even partners with familial or fraternal relationships may face professional conflicts. At the time of company formation, partners often adopt a standard corporate charter provided by a notary or accountant rather than hiring a professional to draft a customized agreement. As a result, they fail to anticipate potential future disagreements, focusing instead on launching their business project.From the outset, during the drafting of bylaws or shareholder agreements, partners can include clauses that anticipate and effectively resolve conflicts.
Let’s take the example of a decision-making deadlock between partners.
Certain deadlock-breaking clauses outline multiple steps to reach an agreement, such as a reflection period or additional meetings. If disagreement persists, the decision can be escalated, for instance, from the manager to the shareholders’ assembly. Another option is to assign a casting vote to a specific partner in case of a tie. However, this solution is delicate, as it requires one partner to accept a subordinate position. A third alternative is to involve a third partner holding a small stake in the company, granting them the power to break deadlocks and ensure decision-making continuity. This approach is better suited for specific operational decisions rather than broader management conflicts.
An Option: The “Russian Roulette” Clause (Buy or Sell)When two partners hold equal shares in a company and fail to reach an agreement (resulting in a deadlock situation), one of them should sell the shares to the other, but whom and at which price? To resolve this issue, the partners can agree on a so-called “Russian Roulette” clause that operates as follows:
⚠️ Risk: If the first partner proposes a price that is too high, he/she might be forced to buy at that price. This mechanism ensures that the proposed price is as fair as possible, as the party making the offer does not know whether they will end up as the buyer or the seller! When the right to trigger the clause is granted to only one partner, it is referred to as an asymmetrical clause. Conversely, if both partners have this right, it is called a symmetrical clause. However, a symmetrical clause should include also priority mechanisms in the offer formulation to prevent deadlock situations if both partners trigger the clause simultaneously. Several other variations of the Russian Roulette clause exist— common in North America—that allow for price variability:
The Italian Supreme Court, in ruling no. 22375 of July 25, 2023, confirmed the validity of the Russian Roulette clause in Italy. The Court emphasized that this is a legitimate choice for partners, who are free to negotiate and incorporate this clause, along with its variations, into their shareholder agreements. This mechanism effectively addresses the risk of management paralysis between partners holding equal capital shares.
|
Integrating Conflict Resolution Clauses in Shareholder Agreements
In our previous articles on alternative dispute resolution (ADR) methods and the advantages and disadvantages of litigation, we highlighted how, in many situations, it is preferable to include an alternative dispute resolution clause in the articles of association and shareholder agreements to reduce the high costs and long timeframes of litigation while also promoting the maintenance of good relations. Among the options:
Mediation
A neutral mediator helps parties reach an amicable agreement.
Mandatory Mediation
Since 2023, mediation is mandatory in Italy for disputes within partnerships, consortia, and joint ventures. This means that, in these cases, partners can only approach a judge after having attempted mediation.
Optional Mediation
Even if partners may be reluctant to allow external intervention in the management of their company, mediation can be effective in bringing to light unspoken concerns, mistrust, and fears that usually remain implicit between partners. It also helps foster dialogue and consider solutions from a new perspective. Shareholders of capital companies can also voluntarily resort to mediation to resolve a conflict.
Arbitration
A binding solution in which an arbitrator decides on the dispute. Arbitration is an alternative to judicial proceedings.
Shareholder agreements
The most well-known are shareholder agreements that include clauses such as those mentioned in paragraph 4 or the following paragraph, as well as others (e.g., drag-along and pre-emption rights), which help prevent future disputes over shareholdings or necessary to regulate the management of the company. For example, the Italian Supreme Court ruling no. 36092/2021 confirmed that the shareholders’ agreement, in which the shareholders have established the re-election of a person to the position of director for two successive three-year periods, is not null and void for violation of articles 2372 and 2383 of the Italian Civil Code, having merely internal and mandatory organizational effects on the vote, without affecting the functioning of the assembly body, in which by law such decisions must then be necessarily formalized.
Case Study: Competition from a Current or Former Partner
A rather Italian common case in practice is the situation of a conflict of interest or liability involving a partner who takes on work positions in other companies operating in the same sector or in direct competition with the company he/she is a partner of.
This situation—often causes lengthy and complex conflicts, loss of know-how, and reduced revenue for the affected company— should be prevented. Partners, including directors, of the most common capital companies (LLC and PLC) in Italy are not legally bound by a specific non-compete obligation. Therefore, it is in the best interest of those who establish and invest in a business in Italy, to ensure that their efforts are not dispersed in favor of third parties. This can be achieved by including binding non-compete obligations for partners in the company’s bylaws or shareholder agreements, thereby preventing undesirable and fairly frequent situations.
At LEX IBC, we often advise our clients to include specific non-compete clauses in their company bylaws or shareholder agreements.
If this is not possible, it is at least advisable for partners to establish appropriate corporate mechanisms to safeguard business know-how and the confidentiality of information.
Conclusion
Conflicts between business partners can significantly impact a company’s sustainability and value. However, by identifying the root causes of conflicts, implementing preventive strategies, and adopting suitable resolution methods, it is possible to manage and resolve disputes effectively. Our law firm, LEX IBC, provides personalized legal advice in drafting shareholder agreements, confidentiality agreements, way-out clauses, and dispute resolution strategies, as well as legal assistance in litigation defense.
Mariangela Balestra and Marie Vanswevelt
Lex IBC – 2025, All rights reserved. No text and data mining.