Navigating Shareholder Disputes

Shareholder disputes can affect a business’s reputation, profitability, valuation, and operation. These disputes, which can affect companies of all sizes, arise when disagreements or conflicts emerge among shareholders or between shareholders and the company’s management. As a business owner, it is crucial that you understand the common causes of shareholder disputes, how to prevent these disputes, and the steps and available remedies when conflicts arise so you can maintain stability and protect your business’s long-term interests.

Why Do Shareholder Disputes Arise?

The first step in navigating shareholder disputes is understanding why they occur. The following are some of the common causes of shareholder disputes;

• Breach of Shareholder Agreements: If parties believe that the terms of a shareholder agreement have been breached, such as unauthorized transfer of shares or failure to comply with buy-sell agreement terms, it can lead to disagreements.
• Conflicting Goals: When shareholders do not have the same goals for the company’s future, it can cause significant friction.
• Unfair Treatment: Minority shareholders may feel majority shareholders are making decisions that serve their interests while disregarding the rights or well-being of others, leading to disagreements between the two groups.
• Financial Disagreements: Conflicts may arise over compensation, dividends, or the use of the company’s financial resources.
• Management Disagreements: Differing opinions on how the business should be run can cause conflicts among shareholders or between shareholders and directors.

Preventing Shareholder Disputes

The best way to handle shareholder disputes is to avoid them in the first place. The following are some steps companies can take to mitigate the risk of shareholder agreements;

• Ensure clear and comprehensive shareholder agreements are in place that set the rules of engagement. These agreements should define, among other things, rights, decision-making processes, dividend policies, and procedures for selling or transferring shares.
• Maintain open and regular communication with shareholders to ensure expectations are aligned and avoid misunderstandings.
• Ensure the interests of minority shareholders are protected.
• Clarify each shareholder’s role and responsibility within the company to prevent overstepping of boundaries and unhealthy competition.
• Regularly revise policies and agreements to align with the evolving conditions and shareholder dynamics.

Resolving Shareholder Disputes

Before disputes escalate, involved parties can engage in direct discussions and reach a mutually acceptable resolution. However, when shareholder disputes escalate, legal options may be necessary, including the following;

• Alternative Dispute Resolution (ADR): This includes mediation and arbitration, which involve a neutral third party helping to facilitate a mutually agreeable resolution.
• Litigation: In severe cases or when ADR fails, going to court may be the only viable option.

Remedies for Shareholder Disputes

The most appropriate remedy/remedies for shareholder disputes depend on several factors, including the nature and severity of the conflict, the outlined terms, and the relationship between the parties involved. Remedies for shareholder disputes include the following;

• Buyouts: A shareholder may agree to buy the other’s shares to avoid ongoing conflict.
• Injunctions: An injunction is a court order to prevent harmful actions by a party. If, for example, a shareholder is disclosing trade secrets or misusing funds, the court may issue an injunction to stop the behavior.
• Damages: Compensation may be awarded for losses suffered.

Legal Help Is Available

If faced with a shareholder dispute, it is crucial to seek the help of a business attorney. A skilled attorney can help you understand your legal rights and options and guide you through the legal process. For legal help, contact our knowledgeable business attorneys at SAC Attorneys LLP.