Methods that may prevent shareholder disputes

On Behalf of | Feb 11, 2021 | Business Litigation |

Shareholders want their businesses to be successful. But they may disagree on how to achieve success and create disputes. However, destructive shareholder disputes and business litigation may be prevented.

Dispute impacts

A shareholder dispute may be costly if it goes to litigation. Arbitration can also cause lost time and revenue. Either process may become focused on defeating the opposing party instead of reaching a positive settlement.

Time spent on trying to resolve disputes, especially one that has escalated, distracts from running the business and may impede future growth and profitability. If controlled early, a dispute may be resolved with less impact on the company and without extended litigation.

Shareholders’ agreement

A solid shareholders’ agreement, created when the company began, can play a large role in preventing shareholder disputes. It should have several components.

First, it needs to protect minority shareholder rights. Because most corporate decisions are made by majority vote, shareholders owning less than 50 percent of the company’s shares may believe they have no corporate control. Provisions requiring that minority shareholders approve clear certain decisions can protect their rights and avoid disputes.

But minority shareholders could hold up the majority’ s decision to sell their shares of the company if the minority wants to keep their corporate shares or prevent the sale of their corporation. Companies may prevent conflict if the agreement contains provisions requiring minority shareholders to sell on the same terms as the majority shareholder.

The agreement needs to address deadlocks because votes will often lead to a tie if shareholders have even shares. A dispute resolution clause can help unravel these deadlocks.

Clauses governing the transfer of shares prevent shares being sold to anyone. When this occurs, current shareholders operate while being unaware how many shares are held. Clauses granting preemption rights on transfer can help track shares.

Record-keeping

Thorough records can also help prevent disputes. Documents such as shareholder meeting minutes, logs recording important decisions, agreements and bylaws can help reduce  damage caused by disputes before they increase. Complete and accurate records can provide information that helps determine which party is correct.

Mediation

Mediation is a frequently used dispute resolution method for preventing litigation among shareholders. Mediation is more effective early in a dispute before parties become less flexible.

Shareholder activists

Learn about any causes supported by shareholder activists and how business practices may be managed to deal with them. If these cannot be addressed in daily operations, think of ways to manage any disputes.

Attorneys can help businesses prevent disputes. They can also defend corporations in litigation.