Four Common Shareholder Disputes and How to Avoid Them

There can be many different types of shareholders in a company, from friends and family members with just a modest holding to those who have a massive stake in your business. Any shareholder, however, can be the source of a dispute, no matter how big or small their holding. Since they have a financial stake in the business, these disputes can quickly turn ugly if not managed and mitigated properly. This article outlines some of the most common shareholder disputes and how you can avoid them.

1. Disagreements over Business Management

Shareholders may have a problem with how you decide to run your company or if you decide to take it in a new direction. These disputes often occur in smaller, family-run businesses. Decisions over large purchases or new employee posts also can cause tension and disagreements that flare into conflict.

2. Fiduciary Misdeeds

In private companies, shareholders have specific fiduciary duties to each other even if the business doesn’t directly employ them. Typically, this means that shareholders are required to be open and honest with one another regarding business matters. If, for example, a shareholder has a conflict of interest that could be detrimental to the business, they should declare it. Another example would be withholding financial information needed for making business decisions. Acting in a manner that neglects or violates a shareholder’s fiduciary duties can cause lead to expensive courtroom battles.

3. Lack of Respect for Minority Shareholders

The fewer shares a person holds in a company, the less influence they may have over daily operations, and they may feel disgruntled if they are overlooked in the decision-making process. This can cause minority shareholders to bring a lawsuit against those holding the majority of the shares because they don’t feel they are receiving fair treatment.

4. Differences in Financial Compensation or Contribution

Shareholders, regardless of their holding, should be treated fairly. If, for example, major shareholders are given better rates than minority shareholders, this could lead to a fight as well.

So How Can You Handle These Kinds of Disputes?

A shareholders agreement is usually the best way to head off such problems. While it may not prevent conflicts from occurring, working out the terms of ownership in advance can save a lot of time, energy, and money when trying to sort out any disagreements. Shareholder agreements are legally binding and should cover who has control of the business, how additional capital will be raised if necessary, accountability, profit, dividend allocation, exit strategy, insolvency, and so on. Breaching a shareholders agreement is serious, giving all parties an added incentive to act responsibly toward their fellow shareholders and giving the company a great defense against preventable and expensive conflicts.

An experienced business lawyer can help you set up an agreement that includes everything you need to protect your business and its shareholders too. Contact Integrated General Counsel today for a free consultation.

Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.