Most Common Shareholder Disputes and How to Avoid Them

Shareholders in large private corporations (or even partners in small to medium-sized companies) may not agree all the time. There may be times when their differences come in the way of their business relationships.

Often, these disputes are resolvable with an open and honest sit-down among the parties involved. But sometimes, these conflicts also lead to falling out, or worse, lawsuits.

In this publication, you’ll find out how you can avoid these conflicts and what you can do to resolve them. But first, below are some of the most common shareholder disputes that may happen in your company.

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Gibbs Wright Litigation Lawyers

Gibbs Wright Litigation Lawyers is a top-tier, exclusive litigation firm. Our mission is to help you win your legal battles and get back to business as soon as possible. We offer unparalleled service, dedication, and clear communication to ensure that you achieve the best possible outcome for your situation.

Breach of the shareholder agreement

Every shareholder in a company should follow a form of agreement called the shareholder agreement. This agreement outlines the direction of the company, the rights and responsibilities of every shareholder, the regulation of the sale of the company’s shares and basically all the dos and don’ts of the company.

It’s considered a breach of shareholder agreement when:

    • the company decides without the majority vote of the shareholders;

    • the shares of the company are being sold without the knowledge of other shareholders or in a way that violates the agreement; or

    • confidentiality is breached.

Disagreements over the business direction and management

Disputes over the company’s direction can happen in a business of any size. A business is often built by two or more individuals from the ground up, and as the company grows, that’s when differences in ideas about the direction of the business and how to manage it can start to arise.

If not prevented or solved immediately, these differences may lead to the falling out of the owners, or even worse, a lawsuit.

Fiduciary misdeeds

A fiduciary is a person who is legally in charge of managing assets or other interests of a certain individual or a group of people. For example, as lawyers we have fiduciary duties to our clients. So does the corporate board and the shareholders of a company.

While shareholders don’t generally owe fiduciary duties to other shareholders, this may change if the shareholders also serve as officers or directors of the company.

If a fiduciary fails to carry out his or her duties or manage the funds, assets, personal information, and others that were entrusted to him or her, it’s called a breach of fiduciary duty.

This breach can very likely cause a dispute among shareholders and a litigation lawyer might need to step in to prevent further risks or harm to the company.

Differences in compensation and responsibilities

Naturally, any employee wants to be compensated rightfully for the work that they put in. And it’s not any different at the higher level of the company.

That’s why differences in how shareholders are getting paid, and how responsibilities are shared, can also be a source of conflict. However, this type of dispute can easily be prevented by outlining all details thoroughly in contracts or shareholder agreements.

Minority shareholders are not respected

In private corporations, there are minority and majority shareholders. And often, those in the majority may not have the best interests of the minority stockholders in mind — since they don’t necessarily have a great impact on the business decisions of the company.

This type of oppression or lack of respect can often lead to disputes and lawsuits. To prevent this from happening, companies must establish policies that will fully protect the rights of all shareholders, especially those in the the minority.

Conflicts of interests

Conflict of interest happens when a shareholder has a vested interest — such as money, relationships, or knowledge — or any kind of involvement in a project or investment that clashes with their duties or status as a shareholder in a company.

When shareholders choose their personal interests over their duties to the company, that’s when disputes can happen and this self-serving act, of course, often has legal ramifications.

How to prevent shareholder disputes

As the adage says, prevention is better than cure. Avoiding these disputes, even before they happen, is what every company should strive for. And to do that, you’ll need:

A written agreement — crafting a shareholder agreement can help prevent disagreements. Essential topics must be addressed in this formal agreement to ensure that no disputes arise. Some of these topics are:

    • role of each shareholder and other people in the company;

    • their duties to the company;

    • how much money must be contributed;

    • decision-making processes;

    • compensation; and

    • how a shareholder can withdraw and how they will be replaced.

A competent attorney — lawyers that are well-versed in corporate and business law can help you draft shareholder or partnership agreements. But more importantly, they can provide sound legal advice for when anything goes south.

If it does go south, and a dispute arises, that’s when the experience of Gibbs Wright Lawyers comes into play.

How to resolve shareholder disputes

Here are some ways we can help you resolve shareholder disputes that may arise in your company:

Negotiation

Sometimes, all you need to do to resolve a dispute between shareholders is to sit down, have an honest conversation, and compromise.

Normally, shareholders can do this on their own, however, sometimes an informal discussion just won’t cut it. And that brings us to the next step.

Mediation

If negotiation doesn’t work for both parties, a mediator may need to be involved. Much like the negotiation process, mediation is relatively informal. Only this time, a neutral party is involved.

In this process, the mediator hears both sides of the coin but won’t give a ruling or verdict for the conflict. Instead, they will provide insights or pieces of advice that will help the shareholders involved to come up with their compromise.

Arbitration

Arbitration is the process where the neutral party, called a private arbitrator, acts like a judge, and makes a verdict on the dispute. It’s a lot more formal than the first two steps and the judgment made by the arbitrator is legally binding and enforceable just like a judgment made by a court.

Some companies require private arbitration in their shareholder agreement to resolve disputes because it is deemed to be a lot more inexpensive whilst being more effective. In other organisations, however, all shareholders must agree to use private arbitration to resolve any conflict.

Court action

As much as possible, bringing the dispute to court should be the last option. Because most of the time, it can get ugly and expensive. But if ever it comes down to that, always seek legal advice from experienced lawyers like Gibbs Wright Litigation Lawyers to help you minimise your risks and damage to the reputation of the company.

How can Gibbs Wright Litigation Lawyers help?

If shareholder disputes arise in your company in Queensland, call Gibbs Wright Litigation Lawyers. Our team of litigators have the skill and understanding needed to resolve any type of shareholder dispute. With our experience, we can help take away the stress, emotion, and costs of such disputes.

Talk to us.

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