At the time of company formation, shareholders are often focused on launching operations and pursuing growth opportunities. Alignment among founders is usually strong, and informal understandings may appear sufficient. ALSO READ: Why signing a contract is only the beginning of a business relationship However, shareholder disputes are a common occurrence in many jurisdictions and can significantly affect a company’s stability and performance. As Judge Thomas R. Mulroy, a member of the Chicago Bar Association, observed, shareholder disputes often resemble divorces in their complexity and emotional intensity. When poorly managed, such disputes can disrupt operations, impair decision-making, and lead to prolonged and costly legal proceedings. Consider a scenario in which three entrepreneurs in Kigali establish a company based on a shared business idea. They contribute capital, register the company, and operate successfully for a period of time. As the business grows, differences emerge regarding strategy, risk tolerance, and participation in management. Without clear structures to address these differences, disagreements may escalate, potentially resulting in litigation and operational paralysis. This scenario reflects a common pattern observed in many shareholder disputes. Many shareholders conflicts stem from inadequate planning at company formation. Shareholders often initially rely on mutual trust rather than formal agreements. As business priorities, financial needs, and personal circumstances evolve, however, the absence of a shareholder agreement outlining decision-making processes, roles, exit mechanisms, and dispute resolution procedures makes disagreements difficult to manage. A shareholder agreement established at formation provides a framework for addressing challenges before they arise. Informal governance practices further increase dispute risk. Companies may operate for a long period without formal meetings or documented decisions, and as shareholder involvement changes, some may become more engaged while others feel excluded. Without regular meetings and proper record-keeping, concerns go unaddressed until positions become entrenched. Consistent meetings and documented resolutions ensure transparency and ongoing participation by all shareholders. Unclear allocation of authority is another frequent source of conflict. During formation, shareholders may not clearly define management roles or decision-making authority. As the company grows, ambiguity regarding responsibilities, such as who can enter into contracts, make hiring decisions, or approve strategic initiatives, can lead to disputes when shareholders hold differing assumptions about their authority. Differences in strategic vision also commonly arise as businesses mature. Shareholders may disagree on issues such as expansion, investment priorities, or risk exposure. Without agreed-upon mechanisms for resolving strategic disagreements, these differences can escalate into broader conflicts affecting the company’s operations and governance. Financial matters are often central to shareholder disputes. Shareholders may have differing expectations regarding profit distribution, reinvestment, and dividends. Majority shareholders may control financial decisions in ways minority shareholders perceive as unfair. Combined with limited transparency and weak governance, financial disagreements can undermine trust and threaten the company's viability. Many of these risks can be mitigated through careful planning at the formation stage. Engaging an experienced legal professional to draft a comprehensive shareholder agreement is a critical step. Such an agreement typically addresses voting thresholds for key decisions, defines shareholder roles, outlines procedures for share transfers or exits, and establishes dispute resolution mechanisms. In addition, adopting sound corporate governance from the outset is essential. Regular board and shareholder meetings, clear financial policies, and oversight structures promote accountability and informed decision-making. Financial transparency is critical. Although shareholders may unanimously decide not to appoint an auditor, this may be unsuitable for multi-shareholder companies. Independent audits provide objective verification of financial information and reduce disputes. Proper documentation is another essential preventive measure. While informal governance is common, the 2021 law governing companies in Rwanda requires that companies maintain key records such as incorporation documents, share registers, accounting records, meeting minutes, resolutions, and relevant shareholder communications for the legally required period, typically at least 10 years. These records provide clarity and evidence in the event of disagreements, reducing reliance on memory or informal understandings. At the start of a business venture, shareholders should consider several key principles, establishing a comprehensive shareholder agreement, clearly defining roles and decision-making authority, holding regular and well-documented meetings, maintaining financial transparency, and setting out clear exit mechanisms. These measures support long-term stability and effective governance. The author is a lawyer specializing in corporate commercial matters.
