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6 common causes for shareholder disputes

On Behalf of | Jan 31, 2020 | Business Litigation |

Shareholders hold equity in companies in the form of stocks. They essentially own a little piece of what is likely a very big pie. Most shareholders are minority shareholders, who hold less than 50 percent of a company’s equity. There are some majority shareholders, however, who hold 50 percent or more of a stock. These individuals are often company founders or original investors.

Shareholders have set rights. When problems arise among shareholders or between shareholders and executives, it is known in the legal and business realms as a shareholder dispute. What can cause such a dispute?

Here are some scenarios that could ignite a tricky situation:

  • Breach of the shareholder agreement. Every company will have a written agreement with its shareholders. A shareholder selling their shares in violation of the agreement would qualify as a breach of the terms, creating a problem.
  • Disagreement over direction. Commonly, a number of shareholders might become unhappy with management’s decisions to take the company one direction or another. This might include a decision like a large real estate purchase, hiring or firing a key individual or rebranding choices.
  • Monetary misdeeds. Shareholders have a duty to treat each other with respect—at least monetarily. It’s part of the agreement they sign. This is especially true of dealings between majority and minority shareholders, as the actions of the former can affect the latter enormously. Withholding information or financial misconduct can lead to disputes.
  • Disrespect of Minority Shareholders. While these individuals may not hold much equity in a company, they still have rights according to the agreement that they signed. Majority shareholders can often take advantage of these minority shareholders, by tying up stocks or some other means. If minority shareholders or not treated with respect and their rights disregarded, unnecessary conflict can result.
  • Uneven compensation or contribution. Just like for employees, compensation for shareholders must be fair. It’s a simple statement but if this principle is disregarded, the dispute can be hard to defend.
  • Refusal to provide documentation upon request. Shareholders have the right to see the company’s books and records. It is illegal to deny such a request and very likely that it will cause dissent.

Keep in mind that a legal, well-drafted shareholder agreement is your best defense against any and all shareholder disputes. It should be a useful reference and helpful tool in your arsenal if and when disagreements arise.