Each year, there is a predictable percentage of cases that fall before Pakistan’s Company Benches and Competent Officers under the Companies Act 2017, which do not involve regulatory breaches, but rather frayed relationships: a minority shareholder claiming oppression under Section 286, a stalemate among the directors for a board resolution, or even a family business where a succession issue has hardened into litigation. The inability to prove a point of company law is no reason to win or lose such a battle. They are disputes in relationships in business suits, and Pakistan’s dispute-resolution system is not geared up to being treated as such.

The blend of corporate law and alternative dispute resolution (ADR) requires much greater attention than it is afforded in the practice prevailing in Pakistan. However, there remains very little guidance of mediation as a preliminary or parallel stream in the Companies Act 2017, and the Securities and Exchange Commission of Pakistan (SECP) has been granted extensive jurisdiction in relation to oppression and mismanagement petitions, class action and derivative suits. This is in stark contrast to the UK, where a mediation process, often facilitated by the court, is routinely followed in unfair prejudice petitions under Section 994 of the Companies Act, 2006, mediated by a well-established mediation bar of company-law experts and welcomed by a developed judiciary as a default in an unmediated unfair prejudice dispute involving shareholders. Pakistan has yet to develop these institutional traits nor, till recently, reputable talents to do the same. But that’s starting to change, slowly.

Why Shareholder Disputes Are Different

Commercial arbitration has attracted the lion’s share of ADR attention in Pakistan, largely because cross-border trade and construction contracts have obvious arbitration clauses to point to. Shareholder and boardroom disputes are different in kind. They typically arise between parties who must continue to work together, or at minimum wind down their relationship without destroying the underlying business. In an effort to obtain his or her recovery in an oppression claim, which may take four years, a minority shareholder is sometimes left with a company that lost customers, key employees, and a banking relationship during the process. An agreed-upon board governance without a finding of wrongdoing to affect the ongoing relationship, an agreed-upon exit schedule, a revised shareholders’ agreement or a phased share buy-out are examples of outcomes that are structured within a mediation framework that cannot be reached through litigation.

In Pakistan, most companies are family owned and/or closely held businesses which make them difficult subjects for a litigation process, particularly one of an adversarial nature. Disputes in these companies are frequently intergenerational, involve overlapping family and commercial grievances, and are complicated by informal arrangements never reduced to writing. A court applying the Companies Act can only rule on what is pleaded and proven; it cannot restructure a family’s business relationships going forward. A talented mediator, on the other hand, can manage both sides of the commercial conflict and their relationship in a single room – and that is why in jurisdictions with fully developed ADR systems, some have begun to think about family business conflicts as a case to mediate first, rather than a case to mediate last.

The Regulatory Gap

The Alternative Dispute Resolution (Accreditation) Rules, 2023, published by the Ministry of Law and Justice, were a needed initial measure as they provided for the first time, a government-recognised accreditation process of mediators, thus solving the issue of commercial parties not relying on the results of ADR. Contingencies of mediators’ accreditation are not the full architecture. What remains to be done is a corporate-law-specific mediation track to be integrated in the Companies Act itself, such as a stipulation that petitions for oppression and mismanagement under Section 286, or any disputes before the Competent Authority under the class-action provisions of the Companies Act, be compelled to go to the mediation route, before hearing, unless demonstrated otherwise.

SECP’s own Corporate Governance regulations for listed companies already require board-level conflict-of-interest disclosures and audit committee oversight, but they stop short of building any ADR requirement into how internal corporate conflicts are resolved. That said, there are early signs of movement: SECP has held discussions with a delegation from the U.S. Department of Commerce’s Commercial Law Development Program on establishing a dedicated ADR Centre in Pakistan, drawing on international best practice for out-of-court resolution of corporate disputes. A modest regulatory amendment mandating a mediation window before an oppression petition is admitted, similar to the pre-litigation mediation requirements now common in Indian company law disputes under the Companies Act, 2013 read with mediation panels maintained by the National Company Law Tribunal would build on that momentum and cost little to implement.

Contract Drafting as the First Line of Defence

Much of this dispute load is also preventable at the drafting stage, which is where corporate and commercial lawyers, rather than regulators, carry direct responsibility. Multi-layered provisions that require negotiation to be followed by mediation and ultimately arbitration or litigation, with specific timelines and triggers, are still commonly included in shareholders’ or joint venture agreements, even in the simple commercial service agreements in Pakistan. Many of these provisions, where they are present, fail to accommodate the unique corporate governance of the company to which they are attached and have simply served as an example of the boilerplate provisions provided by precedents from banks and thus ultimately created more issues in resolving disputes than they have resolved.

A multi-tiered clause in a shareholders’ agreement should clearly state at what point the parties are to engage in mediation, who will convening it, on what basis (type of panel or institution where mediation is to be held) and with what deadline (usually leading to a fallback in the form of institutional arbitration under the rules adopted by Lahore Centre for Alternative Dispute Resolution or under an international institution if the company has cross-border shareholders). Though relatively under-used yet, such inclusion, instead of as an afterthought, in the wake of a dispute having already soured relations, would be better done as part of the initial Shareholders’ Agreement.

A Modest Reform Agenda

There’s no need for wholesale legislative changes for any of this. Three steps will make a difference in practice. First, eligibility guidance could be issued by SECP that will encourage, and ultimately, the legislation could require a pre-admission mediation referral in an Oppression and Mismanagement Petition, which is currently available on a list of accredited mediators under the 2023 Rules. Secondly, bar associations and law schools could introduce training on how to mediate corporate conflicts in the continuous training of lawyers, as at present the number of accredited mediators is oriented towards the general cases of commercial disputes and construction contracts rather than corporate conflicts. Third, precedent shareholders’ agreements that are circulated by chambers and included in the full documentation for registration of a company for the SECP may be updated to have a properly-designed multi-tiered clause for dispute resolution that leaves no room for an afterthought.

Pakistan’s corporate sector does not lack disputes; it lacks a resolution architecture proportionate to how those disputes arise and unfold. Litigation will remain necessary where genuine findings of wrongdoing are sought, but for the ordinary run of shareholder and boardroom conflict disputes between people who must, for the company’s survival, find a way to continue dealing with one another, mediation is not a courtesy alternative to the Companies Act framework. It is the tool the framework was missing.

References

Companies Act, 2017 (Pakistan), ss. 286 and 290 (oppression, mismanagement, and class actions).

Alternative Dispute Resolution (Accreditation) Rules, 2023, Ministry of Law & Justice, Government of Pakistan.

Arbitration Act, 1940 (Pakistan), and the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011 (giving effect to the New York Convention).

Companies Act, 2006 (UK), s. 994 (unfair prejudice petitions), read with the Chancery Guide’s provisions encouraging ADR in company and business disputes.

Companies Act, 2013 (India), read with the mediation and conciliation panels maintained under the National Company Law Tribunal Rules, 2016.

Securities and Exchange Commission of Pakistan Listed Companies (Code of Corporate Governance) Regulations, 2019.

International Ltd. v. English Biscuits Manufacturers (Pvt.) Ltd., 2003 CLD 815 (Karachi) (on the threshold for oppression and mismanagement petitions).

Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] AC 324 (House of Lords) (leading English authority on the meaning of “oppression” in company law, frequently relied upon in Pakistani jurisprudence).

Lahore Centre for Alternative Dispute Resolution (LCADR) Mediation and Arbitration Rules.

International Chamber of Commerce (ICC) Mediation Rules, 2014, as a comparative model for institutional mediation of corporate disputes.