Everyone beginning a business venture wants it to succeed and grow at each step of the way. The problem comes in when shareholders differ on achieving this success, causing disputes at some point. Shareholder disputes emerge when there is a failure to solve these problems leads to a destructive end while sidelining the objectives of the business.
The predominant techniques to easily solve disputes remain sound shareholder agreements and effective dispute resolution policies.
However, many shareholder disputes are an unavoidable, common scenario in a business setting, and they are easily preventable if not resolved before something sinister festers. Let’s dive in.
Examples Of Common Shareholder Disputes
Shareholders get into disputes over several reasons that become contentious, especially where money is involved. Some might believe that a director, shareholder or executive is not fulfilling their fiduciary duty.
At the same time, some minority shareholders feel that the majority shareholders do not consider their interests.
These disputes are common and usually involve high stakes, hence seek legal advice early from a professional law firm.
Some of the common shareholder disputes include:
- Directors service contact breach;
- Fiduciary duties breach;
- Shareholder agreement breach;
- Conflicts of interest;
- Disrespect towards the minority shareholders;
- Personal affairs affecting business relationships;
- Company management disagreements, etc.
Shareholder Disputes Can Be Costly To A Business
Start by sharing potential outcomes to shareholders and directors to demonstrate why preventing disputes is important.
Shareholder disagreements impact the company in the following ways: it helps to get the ball rolling on preventive measures when you share these impacts.
- High expenses; when an unattended dispute leads to litigation, this becomes expensive. Even when the dispute reaches arbitration, it results in lost revenue and time, especially when those involved take a belligerent attitude. The outcome is a long, drawn-out affair where every party wins against the opposition rather than reaching a productive solution.
- Distracts normal business operations; disputes that get out of hand take a lot of time from those involved, distracting the normal business running leading to potential detriments in future growth and profitability.
- Escalation potential; managing a dispute early, result in minimal impact on the company, but they move from minor disagreements into full-scaled litigious conflicts when not resolved. Therefore, it is best to de-escalate these disputes when they occur and prevent them from developing.
Strategies To Prevent Shareholder Disputes
Consider the following tips to prevent shareholders disputes:
Creating a solid shareholders agreement at the beginning of your company’s life goes a long way to prevent disputes rather than when things get messy. Include the following key elements in the agreement:
- Balance majority and minority shareholders: The majority of corporate decisions are usually made by a majority vote, causing shareholders to own less than 50% to feel out of company control. A policy that states certain decisions should be cleared by the minority shareholders before implementation balances the field and heads off potential disputes. If a majority shareholder seeks to sell shares, the minority shareholders might hold up to the shares to prevent other entities from buying the entire company. A clause stating that both minority and majority shareholders can sell shares on the same terms also goes a long way to prevent disputes.
- Break deadlocks: dispute resolution clauses help break deadlocks when shareholders have even shares that usually result in a tie in votes. But such a clause is unnecessary when your company has a majority shareholder.
- Transfer shares: putting a limit on who can buy shares from the company is allows the shareholders to know the number of shares available and how best to control and regulate the shares. Try working with a clause that grants preemption rights on share transfer, making tracking of shares easier.
Company buyback of shares
A company can buy its shares back from the shareholders through a share buyback. Company buyback is a leeway for a shareholder to move on from the company, especially during disagreements.
By meeting certain Companies ACT 2006, a limited company can buy back its shares.
Mediation is the most commonly used method of preventing litigation in the case of fallouts between shareholders. Sometimes communication is enough to solve a dispute, but this is difficult when shareholders do not see eye to eye. A mediator ensures these shareholders communicate diplomatically.
But keep in mind that it is best to employ mediation earlier than when things have gotten out of hand, tension levels have escalated. People have entrenched themselves into their positions.
Selling shares is a direct option for getting out of shareholder disputes.
If a shareholder is no longer interested in being part of the company or sees no point in continuing with an argument, he can sell his shares; you can also bring a valuator who appraises and buys out shares.
Solve the disputes in court
Finding a reliable lawyer to solve shareholder disputes makes it easy to guide you when the court gives you a verdict. The court may choose to do one of the following depending on the circumstance:
- Wind up the corporation
- Regulate the company’s affairs and conducts
- Order shareholders to sell or purchase shares from other shareholders
- Revoke or make changes to the company’s constitution
Order a party to do or refrain from doing specified conduct, etc.
You can also employ the following methods to solve disputes when necessary for your business:
- Propose a resolution at a general meeting to address the dispute
- If under the employee settlement agreement, you can terminate a shareholder’s employment, do so
- You can file a lawsuit known as a derivative claim against the wrongdoers on behalf of the company.
- If it is equitable and just to wound up a company, present a petition to do so then.
- At times the dispute proves difficult to solve; sell the company, and distribute the proceeds among shareholders following the governing shareholder agreement or the articles of association.
- Call a general meeting between shareholders and consider dismissing a director.
- Keep shareholder activists in mind and consider managing your business practices to accommodate them better.
- Please plan to prevent potential disasters before they happen.
- Keep thorough records such as minutes, agreements, decision logs, etc.
Need Legal Advice?
Get in touch with the bblaw firm in New York to handle any business law cases you may be facing.
Whether your company is in the formation phase or requires dissolution, we can represent you and guide you throughout the life cycle of your business.
Schedule a free consultation today, and we will work for hand in hand with you to create the best technique to use in your case.