There were more than 800,000 small businesses created in the year 2018 and a similar number of companies formed in 2019. However, almost half of them will close within the first year of business. Shareholder disputes can occur when there is a fall out on how to manage, or the overall direction of the company. Shareholder disputes can develop in a variety of ways and create issues for the business.
It is important to have protections in place in case there is a disagreement on business operations. If you need assistance with structuring your partnership agreements, so that you are protected, contact Parikh Law, P.A. and let us help you prevent and manage shareholder disputes.
Common Causes For Shareholder Disputes
Lots of business fail each year due to these common shareholder disputes:
Shareholder Agreement Breach
A shareholder could breach their agreement by not fulfilling the obligations outlined in their contract or making decisions without the support of a majority vote. A shareholder could also breach their agreement by terminating it to the detriment of the other shareholders. It may also be a breachable offense to sell shares to a rival outside of the guidelines established in your agreement.
Direction Disagreements
Sometimes shareholders disagree about the direction in which the business should be heading, leading the company to split. Disputes can stem from personnel disagreements, mismanagement of funds, and other disruptive behaviors.
Fiduciary Disputes
If a shareholder violates the trust of the other shareholders then he/she may find themselves in a fiduciary dispute. The majority and minority shareholders are expected to act in an open, honest, and loyal manner while conducting business. Withholding information, especially financial information, from the other shareholders can cause colossal disputes.
Minority Shareholder Grievances
Since minority stakeholders have a limited share of the power within the business, some states have enacted laws to protect them. If a majority shareholder misuses his position of power, at the expense of the minority shareholders, then a dispute may occur. Minority shareholders have brought suits against the majority shareholder for not paying out dividends, nepotism, using corporate funds for personal benefit, and not allowing shareholders to review business documents.
Compensatory Differences
Payment disputes can happen in a business that doesn’t properly compensate their workers based on their experience and qualifications. Favoritism shown in the business for friends and family can also create problems. If the shareholders are contributing to the business unequally, then this could encourage complications.
How To Prevent Shareholder Disputes?
Seeking the services of a business litigation attorney, while formulating the shareholder’s agreement, may help you prevent some disputes from occurring. Having a strong, and clearly understood, shareholder’s agreement may also help prevent disputes from arising.
Making sure you have employment agreements that outline and protect the rights of your employees will help prevent issues also. Having an open human resources department, and enacting policies that take issues like discrimination and sexual harassment seriously, will also help prevent disruptions from arising.
How To Resolve Shareholder Disputes?
If a dispute does arrive, then it’s important to seek mediation so that all parties involved can have their concerns addressed amicably. If the business is unable to successfully mediate their disputes, then they can solve the disputes with arbitration or litigation. However, when a business chooses those options, they put the resolutions of their conflicts into the hands of an arbitrator or a judge. Hiring an attorney, with experience in business litigation, could help prevent issues in your business.
