5 Common Causes of Shareholder Disputes

Shareholders come in all shapes and sizes. They range from municipal pension funds with millions of shares of Apple to your Aunt Jane who owns stock in her family’s private company. Regardless of how many stocks they own, the pension fund or your Aunt Jane have the potential to get involved in a shareholder dispute with the owners of the company or other shareholders.

What is a shareholder dispute? Simply put, it is a disagreement amongst shareholders or between shareholders about the governance of the corporation or some other essential detail about the company’s operations, finances, etc. Since all shareholders have some financial stake in the business, the tensions will probably be higher than in a normal business dispute and the causes of the dispute may be more complex and involved. Here are five common causes of typical types of shareholder disputes:

1) Breach of the Shareholder Agreement: Breaches can be as serious as a shareholder selling their shares in violation of the agreement, particularly if they sell them to a rival or competitor. Other breaches can include one shareholder desiring to terminate the entire agreement against the wishes of other shareholders.

2) Disagreements Over Direction: This is a very common reason for shareholder disputes, particularly again in closely-held small family corporations. Decisions regarding the direction of the corporation or even a decision to cease operations can spark a shareholder backlash. Other decisions that can trigger disagreements including firing or letting go non-shareholder employees, large purchases or outlay of capital, and disruptions such as moving the business.

3) Fiduciary Misdeeds: Shareholders of privately-held corporations have fiduciary duties to each other regardless of whether they are employed by the business. At a bare minimum, shareholders are required to deal with each other in an open and honest manner with loyalty and candor. This is particularly true of majority shareholders in dealing with minority shareholders. Along these lines, shareholders who have conflicts of interest with other shareholders or withhold vital financial information from other shareholders can trigger major disputes.

4) Minority Shareholders Getting No Respect: Minority shareholders in private corporations are at a disadvantage from the outset since they have fewer shares than the majority shareholders and may have little heft in seeking real change. However, many states recognize and protect the rights of minority shareholders, who are vulnerable to being frozen out of decisions or management. For many minority shareholders, the stock may not be marketable to others so their investment may be tied up and at the whim of majority stockholders who may not have their best interests in mind. Oppressed minority shareholders can bring suits against the majority stockholders for a variety of situations such as not being issued dividends, corporate funds being used to pay family expenses, and failing to allow minority shareholders to inspect corporate documents.

5) Differences in Compensation or Contribution: Ideally, shareholder employees should be compensated in a manner that is both fair and commensurate with their experience, training, and industry. When this doesn’t happen and the employees are paid at disparate rates for no apparent reason other than family connection, conflict will arise. Similarly, differences in contributions of shareholders, whether monetary or sweat equity can be a source of conflict, particularly if one shareholder is seen as not contributing their fair share.

The best defense against a shareholder dispute is to have a strong and well-drafted shareholder agreement in place from the start. If you are looking to get a shareholder agreement together or need guidance on a current shareholder dispute, contact the team at Trembly Law for the vital legal guidance you require.