Shareholder disputes: Common Causes & Solutions

July 15, 2022

Today’s corporate environment can involve multiple levels of complex business litigation, including at the shareholder level. Many companies use shareholder agreements to assist them in defining the shareholders’ duties, responsibilities,…

Today’s corporate environment can involve multiple levels of complex business litigation, including at the shareholder level. Many companies use shareholder agreements to assist them in defining the shareholders’ duties, responsibilities, and rights. It also serves to protect your business by ensuring that shareholders are treated fairly.

Shareholder agreements can cover the buy-sell rights for shares, restrictions regarding transferring shares, voting rights, employment duties, and more. The more comprehensive that agreement is, the more likely you can avoid potential disputes between shareholders.

These agreements should be drafted when starting your company or when you are issuing your first shares. What should be included in your shareholder’s agreement depends on your expectations for your shareholders and what your company will provide to your shareholders.

To understand why these agreements are so critical, here are a few common causes of shareholder disputes and how your shareholder agreement can help avoid potential complex business litigation.

Minority Shareholders Having a Limited Say

Minority shareholders can feel they have limited ability to influence big decisions, or majority shareholders are ignoring their input altogether. To avoid these potential concerns, your shareholder agreement should include a voting clause that assists in balancing the rights of your shareholders, both the majority and minority.

One way you can do this is by stipulating unanimous consent, which allows a single shareholder to disrupt the majority’s efforts, or include a supermajority vote, requiring a percentage of votes for anything to pass. You might also consider incorporating specific rights targeting your minority shareholders to avoid confusion and minimize potential shareholder oppression in the future.

Minimizing Potential Conflicts of Interest

Problems can also arise when one of your shareholders appears to have a conflict of interest, perhaps by being involved in another business that competes with your company.

Incorporating language that specifies your company’s interests comes before any personal interests or duties outside of your company. You can also outline what type of financial information needs to be shared with the company to avoid any potential conflicts of interest by shareholders in the future.

With clear language, you can minimize potential disputes or reduce future complex commercial litigation, particularly if a shareholder doesn’t comply with the agreement.

Shareholder Neglecting Their Duties

When a shareholder neglects their defined duties, resentment can build up. Your shareholder agreement binds them to participate in defined duties and obligations, so you want to clearly define those, including what is expected of each shareholder.

By doing so, you outline what everyone is expected to do as part of devoting their best efforts on behalf of your company. You should also outline what can happen if those expectations are not met. By clearly outlining these aspects of a shareholder’s responsibilities in advance, you can reduce the potential risk of disputes between shareholders over their duties and responsibilities.

Unclear About the Company’s Direction

Shareholders might disagree about the direction the company needs to take as it grows or the industry and economy undergo changes. That can include whether or not the business will take on more debt since the shareholders will carry responsibility for that debt should the business investment not be successful.

Your shareholder agreement can cover how these types of disagreements can be resolved, including how to avoid having these disruptions negatively impact the running of the business.

Disagreements Cannot Be Resolved

No matter how much you include in your shareholder’s agreement, disagreements can still occur. Therefore, your shareholder agreement must consist of the methods your company will use to resolve those disagreements. You can opt for a compulsory buyout and a formula to determine the buyout price. An arbitration clause can also be included to avoid a potentially long litigation process.

For many businesses, the best way to avoid complex business litigation relating to your shareholders is by crafting a strong shareholder agreement that focuses on addressing potential areas of dispute in advance. Even with a strong shareholder agreement in place, disputes can still occur, resulting in potential litigation. Our experienced law team can assist you in crafting a shareholder agreement to address specific concerns relating to your business.

Our team understands complex business litigation, including handling disputes between shareholders and their companies. Contact us today to learn more about how we can assist you with your shareholder agreement or any potential complex business litigation issues.