Conflict in business is unavoidable. There will always be some amount of friction, no matter the amount of planning and contract negotiations you undertake. This inevitable consequence of being in business is one reason why various stakeholders of a company – no matter the company’ size – should draft and sign robust contracts before engaging in business. Nevertheless, shareholder disputes do occur; our firm has compiled a list of four common ones you might encounter.
1. Conflict of interest. It is difficult for a company to run smoothly and achieve optimum profitability when majority shareholders or corporate management have competing business interests. One point of contention shareholders might have with others involved in a company is a situation in which they suspect a conflict of interest is occurring. This is one of many areas that needs to be addressed within the shareholder agreement.
2. Breach of fiduciary duty. Business owners, partners, and members are expected to make decisions for the good of the company rather than pursue actions that benefit only themselves. Any majority shareholders who have a stake in a company are also tasked with the expectation that they act for the benefit of the enterprise. This expectation, referred to as the fiduciary duty, compels those who wield power within a company to act in good faith and, at the very least, be honest and transparent about their financial decisions. When this duty is not upheld, disputes that arise may be highly contentious.
3. Shareholder oppression. Though an array of laws aim to protect the rights of minority shareholders, complaints of majority shareholders taking actions that damage the interests of other shareholders frequently pop up. When minority shareholders are denied certain rights and obligations, such as not being allowed to inspect certain company documents or feeling they are getting squeezed out, they may pursue a shareholder oppression suit. This is not to be confused with breach of fiduciary duty.
4. Breach of contract. A common reason for shareholders to dispute an action by another shareholder or member of a company’s management is when the offending party commits an act that goes against the terms of the shareholder agreement. An example of this might be selling shares to a competitor or making certain decisions without consultation of other shareholders.
Conclusion
It bears repeating that effective shareholder agreements go a long way toward preventing shareholder disputes. While it may not prevent all disputes, it can ensure that a quick and fair resolution for such conflicts can be reached.
Reach out to Salas Law Firm for assistance in drafting your business contracts or for effective legal services in resolving shareholder disputes. Contact us to discuss your options.
John Salas
