Common Causes of Shareholder Disputes 

Next, consider how conflicts tend to arise in the first place. Issues can even surface through regular, daily business interactions. Consider the following: 

• • Differences in vision or strategy: Different perspectives about how the company should run daily can create significant tension between parties with opposing views. This is further complicated if majority shareholders hold too much power over the ideas of others.
  • Shareholder agreement violations: Breaching the terms of  a shareholder agreement, such as failing to meet financial obligations or violating one’s voting rights, will create conflict among staff and hinder the company’s direction.
  • Unequal compensation or distribution of profits: Employees who are also shareholders should be paid based on training, education, experience, and job role expectations. Conflicts also arise when family-owned businesses compensate relatives at higher rates than other staff with similar roles and expectations.
  • Disagreements over management decisions: Shareholders may disagree on management decisions, such as mergers and acquisitions or changes in leadership.
  • Fiduciary duty issues: A breach of fiduciary duty, such as misusing company resources or failing to act in the company’s best interest, can generate mistrust among employees. Additionally, withholding or misrepresenting pertinent information from others can result in significant financial loss.
  • Minority vs. majority shareholder conflicts: Minority shareholders may feel marginalized or ignored by majority shareholders, leading to disputes over decision-making power and control over the company’s direction.

Each circumstance will vary, and avoiding conflict altogether is unlikely. However, parties can proactively address problems before they escalate by implementing effective prevention strategies.

Preventing Shareholder Disputes

Implementing dispute prevention strategies can help deter issues from arising in the first place. If a dispute does arise, these procedures guide the conflict resolution process and help protect the business and its investors. The key lies in securing legal shareholder agreements that contain effective dispute-resolution policies.

Because shareholder agreements are between owners and business managers, the team should collaborate to establish its terms and conditions. The expectations and roles of each party must be clear, and parties must discuss what the company needs, taking into consideration its strengths and weaknesses. 

Additionally, shareholder agreements should be professionally drafted to ensure they are legally sound, binding, and enforceable. It is recommended to establish this agreement before initiating a business endeavor, ensuring that the document includes the following provisions:

• • Balanced voting power: Include clauses that allow minority shareholders to receive similar benefits and voting rights as majority shareholders do. Balancing the power dynamic between minority and majority shareholders can encourage collaboration and deter conflict.
  • Breaking ties in decision-making: In some cases, shareholders may have even shares in the company. Adding a clause that addresses decision deadlock issues can help deter conflict between individual shareholders.
  • Share transfer limits: Existing shareholders should know how many company shares are held. Adding a clause that addresses shareholder restrictions can provide more control over share transfers, avoiding undesirable business associates and preserving existing interests.
  • Dispute-resolution mechanisms: Your shareholder agreement should include preferred dispute resolution methods, such as mediation, arbitration, and litigation. These provisions inform everyone of how the dispute is to be resolved.
  • Buyout processes: Shareholder agreements should include exit strategies and buyout processes for owners who may want to leave the company. Consider including provisions for events that trigger a buyout, who can purchase shares, and how to determine price and payment terms.

Special Considerations

Parties should consider other critical elements such as accurate record-keeping, regular communication between shareholders, setting up a board of directors, and shareholder activists.

• Record-keeping: Maintain thorough, accurate, and updated records of all business transactions. Some examples may include shareholder meeting notes, contracts or agreements, and records of important decisions.
• Communication between shareholders: Effective, regular communication will encourage cooperation and help deter disputes from arising in the first place. Consider holding meetings to discuss issues and ideas, provide updates, and obtain feedback.
• Board of Directors: Shareholders and owners can select members to act as the company’s governing body. The Board of Directors can set strategy, oversee management, and protect the interests of shareholders and stakeholders.
• Shareholder activists: Shareholder activists can influence company decisions by exercising their rights as partial owners. Learn about activist shareholders, the causes they support, and how you can manage the business to accommodate them.

Possible Solutions & Legal Recourse

Legal remedies for resolving shareholder disputes can vary depending on the nature and severity of the conflict. As previously mentioned, a sound shareholder agreement is critical to preventing and resolving conflict. However, parties should also understand the laws and courts governing the contract and any potential disputes. 

One possible legal solution is to engage in mediation or arbitration. Mediation is a non-binding process where a neutral third party helps disputing parties negotiate a settlement. Arbitration, on the other hand, is a binding process where a neutral third party makes a final decision on the dispute. Unlike mediation, the decision made in arbitration is final and cannot be appealed.

Another potential solution is a derivative action lawsuit. Essentially, the lawsuit is brought by a shareholder on behalf of the company against a third party, such as an officer or director, for a breach of fiduciary duty. Derivative actions are complex and require an attorney’s expertise.

Buyouts and mergers can also provide relief. A buyout allows parties to buy another’s share in the company. Conversely, a merger is an agreement that unites two existing businesses into one entity or company. There are various kinds of mergers, all with their advantages and disadvantages. Thus, parties considering this remedy should consult a business litigation lawyer to make informed decisions and draft a binding agreement. 

In some cases, it might be prudent to dissolve the company and liquidate assets. However, shareholders should weigh the pros and cons of this remedy and consider its implications before doing so. Finally, formal litigation may be necessary if the issue cannot be resolved. This remedy can be lengthy and expensive but may be required to resolve the matter.

At any rate, it is recommended to consult a legal expert, such as a business litigation lawyer and take advantage of firms that offer free consultations. This can help you determine the best legal recourse for your specific situation.

Conclusion

A shareholder dispute can be detrimental to any business’s success. To prevent disputes from escalating and ward off unnecessary conflict, parties must understand their causes and solutions and implement dispute prevention strategies. By doing so, businesses can save time, money, and resources and secure a favorable solution in the company’s best interest.