Business / Commercial Law

Shareholder Disputes

Disputes among shareholders cause businesses to suffer operational and financial hardships and disrupt essential business tasks. Companies mired in shareholder disputes generally experience reputational and brand damages, often resulting in the complete destruction of the business if the dispute renders the business unable to provide goods or services. With shareholder disputes posing such potentially grave consequences, it is imperative that business owners take all means possible to avoid disagreements and disputes.

Shareholders are any individual or group legally owning at least one share of stock in a public or private company, having a direct financial interest in the corporation or business. This often includes employees who receive stock options as part of an employment contract or in the form of pension fund contributions.

As shareholders have a personal financial stake in the company, tensions over disagreements tends to be higher than other types of business disputes. This is particularly charged if shareholders feel their rights according to the shareholder agreement are being violated. Though governing shareholder agreements are unique to a specific company, there are commonly shared rights permitting shareholders to:

• Sell their shares in the company
• Purchase additional shares in the company
• Nominate a director or board of directors
• Vote on board-nominated directors
• Propose and vote on shareholder resolutions
• Vote on proposals made by leadership or management
• Receive dividend payments and payments stemming from the remaining assets following liquidation
• File suit against the company for violations of fiduciary duty

The methods shareholders choose to resolve disputes are typically included in the company’s articles of incorporation or shareholder agreements.

With multiple stakeholders in a company, disagreements and disputes are inevitable. Disputes arise when shareholders disagree with the management decisions of the company or funds, lack of communication regarding investments, suspected or legitimate illegal or fraudulent activities, and more. Shareholder disputes can widely differ, depending on the type of company and the level of shareholders’ financial stakes. Common shareholder disputes include:

• Breach of a director’s service contract
• Breach of a shareholder agreement or articles of association
• Breach of financial duties
• Concern over possible fraudulent or criminal activities
• Conflicts of interest
• Differences in compensation or contribution
• Disagreements over company direction
• Disagreements over company leadership or management
• Interest of minority shareholders not being considered
• Lack of communication with shareholders on company finances
• Lack of dividend distributions
• Personal concerns affecting business relationships

Closely held companies with shareholders involved in the daily operations of the business increases the potential for disagreements. Shareholders working together tend to disagree more often over the operations of the business or believe that others are overstepping their roles and threatening the authority of the other shareholders. Disputes of this nature have a greater occurrence in smaller, successful multi-generational family businesses.

Shareholder disputes are common and usually high stakes, financially speaking. Litigation of shareholder disputes is a highly complex and specialized area of law, requiring keen knowledge of corporate law and extensive experience trying dispute cases. Not seeking legal counsel from a business law attorney with experience handling shareholder dispute cases can escalate the seriousness of the dispute and potentially detrimental to the future of your business.

Resolving shareholder disputes begins with a review of the shareholder agreement, which typically include than manner in which disputes are resolved, particularly on procedures for forcing shareholders to sell their shares in certain circumstances. Other remedies for resolving shareholder disputes include:

• Initiating propositions to address the dispute during general meetings
• Appointing a non-shareholder outside party to resolve the dispute, such as a board advisor or disinterested director
• Appointing statutory directors in order to provide new perspective and avoid a deadlock amongst shareholders
• Calling for a general shareholder meeting to consider a resolution to dismiss a director
• Terminating a shareholder’s employment under the employee’s settlement agreement, if applicable
• Utilizing the services of a professional mediator to resolve the dispute
• Arranging a buyout from a shareholder, the company, or an external buyer not affiliated with the company, abiding by company articles and governing shareholder agreements
• Arranging the sale of the company and distribute the proceeds amongst the shareholders
• Drawing a petition to wind up the company, if applicable and equitable
• Filing a lawsuit or derivative claim against the wrongdoers on behalf of the company

The business lawyers at Sidney L. Gold & Associates are skilled mediators, arbitrators and litigators who work tirelessly to ensure our clients meet their goals and resolve shareholder disputes both inside and outside the courtroom. Our knowledgeable attorneys provide top-notch legal strategies and will successfully represent you and your company throughout shareholder dispute proceedings.