Shareholder disputes: mediate, litigate or a hybrid strategy?
Marina Hadjisoteriou
Patrikios Legal, Limassol
Report on joint IBA Litigation Committee and IBA Mediation Committee session at the 2024 IBA Annual Conference in Mexico City
Thursday 19 September 2024
Co-chairs
Stavros Pavlou Patrikios Legal, Limassol; Regional Representative, Middle East, IBA Litigation Committee
Dr Hermann Knott Kunz, Köln; CDRC Liaison Officer, IBA Mediation Committee
Panellists
Dr Mahmood Hussain M&CO Legal; Dubai Officer, IBA Arab Regional Forum
Joanne Lau Hong Kong International Arbitration Centre, Hong Kong
Andrea Orta González Sicilia Orta González Sicilia, Mexico City
Natascha Tunkel Knoetzl, Vienna; Secretary-Treasurer, IBA Mediation Committee
A highlight of the IBA Annual Conference in Mexico City was a panel discussion that examined the different litigation and mediation approaches and strategies in resolving shareholder disputes. It considered the advantages and disadvantages of each dispute resolution method, and the extent to which the two can be combined in the context of shareholder disputes to bring about an efficient resolution.
Opening remarks
Stavros Pavlou opened the discussion by stressing that, while lawyers often label themselves as litigators, mediators or arbitrators, clients ultimately seek dispute resolvers who can recommend the most suitable strategy for each case. He underlined the importance of thinking flexibly and considering possible combinations of litigation, arbitration and mediation.
Hermann Knott and Pavlou introduced the panellists, noting the diversity of their professional backgrounds and jurisdictions. They highlighted this variety would provide a broad, comparative perspective on the challenges of resolving shareholder disputes.
Natascha Tunkel began by noting that mediation is often overlooked, despite its potential to deliver effective outcomes where litigation or arbitration may be slow, costly or procedurally constrained. Arbitration, for example, can take time to establish a tribunal and may be limited by the scope of the arbitration clause, which might not cover all relevant parties in a shareholder dispute. Court proceedings, meanwhile, can be efficient in granting injunctions but may not always be desirable due to publicity.
She stressed that mediation offers a confidential, flexible and creative alternative. However, she cautioned that ‘mediation’ does not mean the same thing across jurisdictions: a family-style mediation differs significantly from a commercial mediation in a shareholder context.
Her key takeaways were:
- Due diligence – Parties should take mediation seriously and carefully select their mediator, just as they would an arbitrator.
- Catalyst role – A mediator is not just another negotiator but a skilled process manager who can keep parties engaged, even when negotiations would otherwise break down.
- Durability of settlements – In shareholder disputes, mediated agreements can be embedded in or amend shareholder agreements, making outcomes as robust and enforceable as those from litigation or arbitration.
She illustrated her points with a recent example where mediation succeeded because the mediator prevented repeated walkouts that would have doomed ordinary negotiations.
Andrea Orta González Sicilia focused on the situations where litigation is unavoidable. The nature of the dispute, she explained, is decisive. For instance, if injunctive relief is needed, only the courts can grant it. Similarly, Mexican law presupposes judicial involvement in cases such as convening general shareholder meetings, suspending resolutions, dissolving a company, etc. However, she emphasised that litigation is not the right approach for every case. Mediation is an excellent alternative in many shareholder disputes, especially given the ongoing judicial reform in Mexico. Currently, dissolution proceedings can take three to five years, and concerns exist about the future quality of judgments under the reformed system.
Orta González Sicilia highlighted that mediation promotes dialogue and preserves relationships: something courts and even arbitrators cannot guarantee. She underlined the importance of appointing mediators with the same care as arbitrators, since unlike judges, mediators need strong business and relational skills. She also noted that under Mexican law, mediation agreements have res judicata effect, with specific enforcement mechanisms in Mexico City and at the federal level.
Dr. Mahmood Hussain shared insights from the Middle East, where around 90 per cent of companies are family-owned and contribute more than 60 per cent of gross domestic product. He recounted the story of a billionaire whose sudden death without proper succession planning sparked a dispute of enormous economic impact, illustrating how shareholder disputes in family businesses can destabilise entire economies.
To address such challenges, the United Arab Emirates introduced the Family Business Law in 2022, which embeds governance and dispute resolution mechanisms into the articles of association of family businesses. The law requires disputes first to be submitted to mediation, conducted by mediators with relevant business expertise. If mediation fails, parties can proceed to arbitration or to a specialised tribunal composed of three respected businesspeople and a judge. This tribunal seeks to combine business acumen with judicial authority and offers a faster, more tailored process than ordinary courts.
Mahmood stressed that these reforms are aimed not only at resolving disputes efficiently but also at protecting the broader economic system from the collapse of major family enterprises.
Joanne Lau explored hybrid approaches, noting that many are uncontroversial and widely used. These include:
- multi-tiered clauses requiring parties to attempt mediation before resorting to litigation or arbitration;
- mid-stream mediation, where parties suspend ongoing litigation or arbitration to attempt mediation; and
- court-facilitated mediation, where in jurisdictions like Hong Kong, courts require parties to file a mediation certificate, with possible cost penalties for unreasonable refusal to mediate.
She emphasised that shareholder disputes often involve high emotions, particularly between founders and financial investors, making mediation especially valuable.
Lau then turned to the more controversial practice of ‘arb-med-arb’, common in mainland China and parts of Asia, where an arbitrator can temporarily switch roles to act as a mediator, and if mediation fails, return to adjudicating the case. Advocates argue that this works because the arbitrator is already familiar with the facts and enjoys the parties’ trust. However, she highlighted serious risks:
- The roles of arbitrator and mediator are conceptually different.
- Confidentiality in mediation may conflict with the procedural fairness required in arbitration.
- There is a risk of apparent bias if an arbitrator who has mediated returns to adjudicate.
In Hong Kong, safeguards exist: parties must consent in writing; confidential information must be disclosed if material; and parties cannot later challenge the award solely because the arbitrator also acted as mediator.
Lau concluded by reflecting on the role of arbitrators in promoting settlement. She suggested it may be useful for arbitrators, during proceedings, to raise the question of whether parties wish to consider mediation or settlement. This would not mean crossing into the mediator’s role, but rather gently encouraging parties to explore consensual options before the adversarial process runs its full course.
The Q&A session reflected the high level of interest generated by the discussion.
From the floor, Justice Liam Kennedy (Judge of the Irish High Court) observed that as a judge and arbitrator he would find it difficult to switch roles: in mediation, parties may disclose weaknesses in their case, which would be hard to disregard if later adjudicating. He underlined that in family shareholder disputes, with strong emotions and egos at play, lawyers fail their clients if they do not at least explore mediation as part of a broader dispute resolution strategy.
Pavlou raised concerns about enforcement risks. If information disclosed in mediation later influences the arbitrator-turned-mediator, parties might argue either that confidentiality was undermined or that impartiality was compromised. He asked whether such risks had been encountered in practice.
Lau acknowledged that the risks are real. She noted that mediation may be undermined if parties hold back information out of fear it could resurface in arbitration. Yet she also observed that sometimes mediation fails because both parties are overconfident about their legal positions; in such cases, an arbitrator acting as mediator may provide reality checks that encourage settlement. This makes the practice ‘high risk, high reward’, and underscores the importance of procedural safeguards.
Hussain pointed out that mandatory mediation in the UAE resolves around 50 per cent of shareholder disputes before they ever reach court or arbitration, significantly reducing caseloads. He also emphasised the cost issue: arbitration, while offering greater expertise than judges in business matters, is considerably more expensive than court proceedings.
Tunkel reminded the audience that the effectiveness of mediation also depends on the surrounding legal system. Pavlou referred to the fact that Cyprus’ new Civil Procedure Rules allow judges to order mediation.
Orta González Sicilia stated that in Mexico judges can only suggest it. She noted that mandatory mediation may succeed if properly supported, but that ‘the horse will drink only if the water is good’ – quality mediators and informed lawyers are crucial. She added that, in Mexico, many parties still avoid mediation simply out of ignorance. Awareness-building by courts and institutions is essential, and the skill of the mediator is decisive in whether a case settles.
From the floor, Cinzia Catelli (Bär & Karrer, Zurich) noted that Swiss commercial courts routinely press parties to settle and that Swiss arbitrators have sometimes followed this model. However, she warned that enforcement risks and challenges to arbitrator independence have made practitioners more cautious in recent years, even where parties sign waivers.
Lau responded with reference to a Hong Kong Court of Appeal decision, where an award from an arb-med-arb process in China was ultimately enforced despite first-instance refusal. She concluded that while enforcement is possible, risks remain if awards are taken to other jurisdictions.