Shareholder Disputes and How to Avoid Them

Shareholder Disputes and How to Avoid Them

Shareholder Disputes and How to Avoid Them

A shareholder disagreement can be uncomfortable for all parties involved. Even worse, it can stir up dissent and conflict within the upper echelon of an organization.

Fortunately, while it is impossible to protect your company from disputes entirely, it is possible to reduce their likelihood. Understanding what causes disputes can help you identify them and take necessary actions before the conflict causes more significant harm to your organization.

What Are Shareholder Disputes?

Shareholder disputes are typically disagreements amongst shareholders about essential details of the organization's operations, like governance or finance. Often, the shareholders will butt heads with company management. More commonly, these disputes arise when parties breach agreements and duties. 

When shareholder disputes occur, it is essential to understand your rights and the legalities of the situation. This is true no matter which side of the dispute you are on. An experienced business litigation lawyer can answer your questions and advise you of your legal options.

Causes For A Potential Dispute

Shareholder disputes can lead to operational and financial problems within the company. That is one reason it is important to understand the common issues that can lead to a dispute. Several issues commonly result in shareholder disputes, including:

  1. Breach of Shareholder Agreement
  2. Business Disputes Concerning Company Direction
  3. Fiduciary Duty Conflicts 
  4. Compensation of Minority vs. Majority Shareholders

Recognizing these disputes and understanding why they occur can help organizations prevent shareholder disputes from occurring in their organization or acknowledge when they should seek legal counsel.

Read on to learn more about the specific causes of many disputes, including:

Breach Of Shareholder Agreement

The shareholder agreement is a contract between the organization's shareholders. It defines and protects certain rights. The agreement may outline shareholder dispute laws surrounding the following:

  • Management and operational strategies
  • The types of decisions that require shareholder approval
  • How the company transfers and creates shares

By violating provisions in the shareholder agreement, the offending party has created a breach. Either party — the organization or a shareholder — can be in breach. When this happens, shareholder disputes are likely to arise. 

You can avoid this issue by ensuring that all relevant parties have copies of the shareholder agreement and are familiar/comfortable with their accompanying rights and duties.

Business Disputes Concerning Company Direction

Another cause of shareholder disputes involves a disagreement over the direction management is taking a company. This is especially common in small private companies and family-owned businesses. Disputes over company direction may involve:

  • Moving the company's location
  • Dismissing an employee
  • Buyout agreements or cessation of operations 
  • Pivoting the company's business objectives

Not every dispute involving an organization's direction is grounds for legal action. A good rule of thumb is to refer to your company shareholder agreement. If you believe your rights or duties have been violated, shareholder dispute lawyers can answer your questions and review your claim.

Fiduciary Duty Conflicts

Company officers and directors are not infallible, no matter how good they are in their role. They may acquire a business that fails, invest in an unprofitable product, or allow a company to fall victim to corporate theft or espionage. Failures such as these affect the most successful corporations. When the failure violates a fiduciary duty, it can lead to shareholder disputes. 

Every director and officer within the organization owes a fiduciary duty to the shareholders and the company. This duty requires them to use reasonable care and diligence when taking actions on behalf of the organization. When they fail to uphold their fiduciary duty, that can lead to a breach. 

Examples of breaches of fiduciary duty include:

  • Owners using company funds for personal expenses
  • Officers failing to vet businesses thoroughly before acquisition
  • Shareholders or company parties engaging in insider trading
  • Management failing to make a sufficiently informed decision

Breach of fiduciary duty is one of the most common claims filed by shareholders during disputes with company owners. Law firms specializing in business disputes regularly review fiduciary duty claims. Understanding the difference between a good-faith error and a breach of fiduciary duty can help you recognize when your rights have been violated and legal action is called for.

Compensation Of Minority Vs. Majority Shareholders

Minority shareholders are naturally at a disadvantage in the boardroom. Fewer shares result in proportionally less power to change a company's operations. Still, shareholder compensation should be fair and reflect their expertise, training, experience, and stake in the company. The organization should consider extensive experience and expertise when determining a shareholder's compensation to ensure each owner receives their fair share. 

If the majority owners abuse or mislead the minority owners, the minority shareholders may have grounds to bring civil litigation against their fellow shareholders.

Common rights of minority shareholders include:

  • Dividends
  • Preemptive rights to buy newly issued shares
  • Voting rights for electing directors, officers, and members of the board of directors
  • The right to sue for wrongful acts

It is important to remember that shareholder rights can vary, though. You should seek legal counsel if your rights as a minority or majority shareholder have been violated.

Strong Shareholder Agreements Can Prevent Disputes

One of the best ways to prevent shareholder disputes is to draft a solid shareholder agreement. A strong shareholder agreement can be the key to preventing catastrophes in your boardroom. By implementing a robust agreement, you can cover most eventualities, which makes a dispute less likely. 

A skilled lawyer should tailor the shareholder agreement to the company's requirements. The agreement should include a dispute resolution clause in case a disagreement arises. An option to  consider is a mandatory mediation or arbitration provision to help resolve disputes that may arise. 

Regardless of which side of the disagreement you find yourself on, you should seek legal advice from corporate dispute professionals if you are in a shareholder conflict. Sometimes, the wording in a shareholder agreement may be vague, difficult to interpret, or even unenforceable. You may or may not be eligible to file a shareholder derivative suit in these cases. 

If in doubt, contact the King & Jones shareholder derivative claims attorneys. Our respected, Chicago-based shareholder dispute legal team can advise you of your legal options and help you successfully resolve your claim.