LAW: Breaking the deadlock

Charlotte Healy and Katie Bewick discuss how expert determination is becoming a popular choice to resolve commercial disputes as it avoids the added time and cost of litigation…

Much of the UK’s pharmacy market is supplied by independent entities which own one or more community based pharmacies and may also provide online retail services.

For commercial reasons, many such pharmacies operate as private limited companies (often family-owned) with a limited number of directors and shareholders. This means that business can often be conducted with relative informality.

However, these businesses are not immune from disputes arising between shareholders and where there are not clear corporate governance documents in place (for example a shareholders’ agreement and/or well drafted articles of association), such disputes can be more difficult to resolve.

When disputes do arise and are not resolved swiftly, they can result in acrimony among shareholders and a deadlock in decision making. At this stage, one way forward (and one which is generally favoured) is to de-merge the business, dividing up the company’s assets and parting ways.

However, it is not always as simple as that. In such situations, it is not uncommon for the parties involved to consider court proceedings, for example, an unfair prejudice petition pursuant to section 994 of the Companies Act 2006.

In these claims, the usual remedy is that the aggrieved shareholder has their shares in the company bought out by the other(s). Alternatively, the shareholder may petition the court for the just and equitable winding up of the company under the Insolvency Act 1986 (during the course of which both sides may make ‘bids’ for assets).

However, the high cost of litigation, length of time, lack of flexibility and publicity of commercially sensitive information (or a combination of all of these) ought to give pause for thought.

As such, alternative dispute resolution (ADR) processes should always be considered at the outset of a dispute. In the context of shareholder disputes within the pharmacy sector, it is often worth considering expert determination.

Expert determination

Expert determination provides parties with an avenue for dispute resolution without the risks and costs of court litigation. A company’s constitutional documents, such as a shareholder agreement or a articles of association may include an expert determination clause which will effectively state that in the event of a dispute (typically in relation to issues which are better dealt with by an expert who is not a lawyer, such as the value of a company or completion accounts), the parties agree to refer the issue to an expert whose determination they agree to be bound by.

Even if there is not a contractual mechanism in place for an expert determination procedure, it is open to parties to agree to undertake an expert determination as part of negotiations.

Expert determination is a confidential, flexible and impartial process. The expert is required to act fairly and give each party a reasonable opportunity to be heard. The appointment of the expert will be governed by contractually agreed terms.

Expert determination can therefore be used in situations where the parties require an objective division of company assets or where the dispute is of a highly technical nature. This process has several advantages when compared to litigation. It is often more time efficient and cost effective than litigation and arbitration.

The parties will work with the expert to set their own timetable and will not usually incur extensive legal costs. They will also share the costs of the expert as opposed to potentially instructing separate experts for litigation.

Additionally, it is a private, commercial process and as a result this often improves the prospects of preserving business relationships and protecting commercially sensitive information. The expert’s determination will also (with the prior agreement of the parties) be fi nal and binding.

Therefore, the process circumvents for the most part, the lengthy process of appeal which is prominent in litigation. It is, however, important to bear in mind that, if enforcement is required an expert’s determination is not directly enforceable (e.g. by court bailiffs). Enforcing it will sometimes require the court’s involvement by way of a separate claim.

Additionally, unlike judges and arbitrators, experts will not usually have the same powers to order disclosure and compel witness evidence. As such, the process does not lend itself well to disputes with either heavy factual or legal elements, or where there has been a complete breakdown in trust and confidence such that the parties are unable to work together (as and when necessary) during the process.

In our law firm, we are able to advise pharmacies on the best course of action, both at the start of a business relationships when contractual provisions are drafted and negotiated and in the event of a subsequent dispute arising among shareholders.

Depending on the particular situation, our advice may involve the recommendation of expert determination as a commercially viable avenue for dispute resolution. Our full-service team of legal practitioners are well positioned to guide you through this and other ADR processes, to the extent that litigation can be avoided.

(The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article you should contact Charlotte Healy or Katie Bewick, solicitors at Charles Russell Speechlys LLP. Charlotte can be contacted on charlotte.healy@crsblaw.com and Katie can be contacted on katie.bewick@crsblaw.com.)