4 common causes of shareholder disputes

On Behalf of | Aug 5, 2021 | Business Litigation |

Business relationships are complex, ever-evolving entities. Individuals have different priorities, motiviations and goals that must be balanced with those of the other shareholders. Even though the shareholders are all generally aligned toward a common goal – the success of the organization – they might all define this in different ways. Unfortunately, even a simple disagreement can lead to a heated dispute that could threaten the future of the company.

While every business experiences different conflicts, there are several common types of shareholder disputes, including:

  • The direction of the company: Decisions regarding the future of the organization can create shareholder backlash. It is not uncommon for one or more shareholders to hold very different ideas about what is best for the future of the corporation. It is likely these ideas do not mesh and can lead to friction that often sparks a dispute.
  • Breach of the shareholder agreement: The shareholder agreement defines numerous aspects of how the business operates. From voting rights to restrictions on transferring shares, the agreement establishes rules. If the shareholder violates a provision in the agreement, disputes could arise.
  • Breach of fiduciary duty: The shareholders have a duty to work together in a transparent, loyal manner. A shareholder who withholds financial information or has a conflict of interest with other shareholders can spark a dispute.
  • The unrest of minority shareholders: By their very nature, minority shareholders are often underrepresented in business decisions. Unfortunately, when these individuals feel the business is not protecting their best interests, they might bring a lawsuit against the majority stockholders.

Drafting a detailed, comprehensive shareholder agreement is the first step in avoiding disruptive disputes. Even with a strong agreement in place, legal action might become a reality. It is important to recognize the signs of dispute and take steps to protect your best interests.