Disagreements and differences of opinion between shareholders can be productive as long as they are resolved to everybody’s satisfaction. But when they are elevated to the level of argument and both sides dig in, they can become ugly and get in the way of progress. Because shareholders have a financial stake in the company’s success, it is easy for things to escalate quickly.
Avoiding and preventing shareholder disputes is in everybody’s best interest. This can generally be accomplished by crafting carefully worded contractual agreements, partnership agreements, articles of association, and shareholder agreements that clearly spell out responsibilities. When these documents are vague or poorly worded, the business is vulnerable to conflict.
Though nearly anything about a business’ operations has the potential for leading to shareholder disputes, there are several situations that tend to give rise to problems. These include:
- Minority shareholders believing that the majority shareholders are acting without consideration of their interests.
- Belief that any single director, executive, or shareholder is falling short of their fiduciary duties and responsibilities. These individuals are obligated by virtue of their position to put the business’ interests above their own.
- Failure to keep shareholders apprised of the company’s financial status.
- Breach of any of the articles of association or shareholder agreements. This can be anything from a shareholder selling their shares in violation of their shareholder agreement to a shareholder attempting to cancel an agreement entirely, without the approval of their peers.
- Shareholders acting in their own personal interest in conflict with the best interests of the organization.
- Disagreements over the direction of the organization. This is a particular concern when the corporation is a closely held family business. This type of dispute can not only jeopardize the future of the company, but familial relations as well.
- Perceived differences in the contributions of different shareholders.
A well-crafted shareholder agreement will provide a roadmap for how to address and resolve shareholder disputes. It provides specific rules and instructions on procedures for each potential source of conflict. If your legal documents fall short in this area and your organization is in crisis, there are several options for addressing the problem. These include appointing a mediator or advisor, redressing the situation at a general meeting, removing a director, negotiating a compromise, and buying out the disputing party.
Each of these solutions can work, but your best approach is to start by consulting and experienced shareholder dispute attorney. For information on how we can help, contact us today.