No one likes to deal with disputes, but they are a fact of life. When two or more people share something, there is always the potential for disagreements. The same is true for shareholders in a company. When two or more people own a company, there will be disagreements. This can occur if the parties have different visions for the company and cannot agree on key decisions. How those disputes are resolved can make or break the company. Sometimes these disputes can be resolved relatively easily, while others can cause long-term damage. If you are a shareholder, it is important to know the most common disputes and how to resolve them.
Below, we look at the most common types of shareholder disputes and how to resolve them.
What Are Shareholders, And Why Do They Matter?
A shareholder is an individual or organization that owns shares in a company. They become partial owners of the company and, as such, have a vested interest in its success. Each shareholder owns a portion of shares, commonly known as a “stake.” This entitles that member to attend shareholder meetings, propose resolutions, and receive dividends ( a share of any profits made by the company). In most cases, shareholders have the right to vote on important company matters, such as the election of directors or the sale of the company.
Shareholders also play a key role in providing capital for a company. By buying shares, they help to finance the company’s operations and growth. In return, they hope to see the value of their shares increase over time.
What Are The Rights Of A Shareholder?
Shareholders commonly have the rights to:
- Require the company organise a general meeting
- Attend shareholder meetings
- Propose resolutions
- Vote on important company matters, such as the election of directors or the sale of the company.
- Inspect company registers
- Sell their shares and purchase new shares
- Propose and vote on shareholder resolutions
- Nominate directors
- Receive dividends
- Sue the company for violations of a fiduciary duty
- Buy out other shareholders
- Personal claims against the company
Most Common Causes of Dispute
Below are some of the most causes of shareholder disputes:
Disagreements over business direction
Often, shareholders will have different ideas about where the company should be headed and how it should be run, how to allocate resources, or what products or services to offer. This type of dispute tends to occur in smaller and start-up companies, where the drive to growth is more significant.
Violation of shareholder agreements
If shareholders have violated provisions in their agreements against the wishes of other shareholders, such as voting rights, transfer restrictions, or buy-sell provisions, this can lead to serious disputes.
Fiduciary mismanagement
Shareholders have fiduciary responsibilities to other shareholders in privately-held companies, even if the business doesn’t employ them. They are expected to be honest and open about the business’s financials. Disputes can arise when some shareholders withhold others’ financial or other important information.
Inequities in compensation or contributions
All shareholders should be clear on what they receive in return for their investment in the company. If some feel they are being taken advantage of or not adequately compensated for their time and money, this can lead to serious conflict. Another source of conflict can result from disparity in shareholders’ financial or work contributions if one is perceived to be carrying a less-than-equitable share of the load.
Minority shareholders disadvantaged by majority shareholder decisions
This can happen when the majority shareholder(s) make decisions that advantage themselves at the expense of the minority, such as paying themselves excessive salaries or dividends, approving loans to themselves, or selling company assets to themselves at below-market prices.
How to Resolve Shareholder Disputes
Check the Terms of the Shareholder’s Agreement
if there is a shareholders’ agreement in place, review it to see if it provides guidance on resolving disputes. The agreement may have dispute-resolution provisions, such as arbitration or mediation clauses, that can save time and money.
Pass a Resolution to Hold a General Meeting
If there is no shareholders’ agreement, or if the agreement does not provide a method for resolving disputes, you can pass a resolution to hold a general meeting. You will need to notify all shareholders of the meeting and include the agenda item “dispute resolution” on the agenda. At the meeting, shareholders can discuss the issue and try to come to a resolution. You may need to consult a lawyer if the dispute cannot be resolved.
Appoint a Mediator
If you have a shareholders’ agreement, it may include a clause that requires you to appoint a mediator to resolve the dispute. A mediator is a neutral third party who will help you and the other shareholder(s) agree. Mediation can be cheaper and faster than going to court and can also help preserve relationships.
Take the Dispute to Court
You may need to take the matter to court if you cannot resolve the dispute through mediation or discussion. This is usually a last resort, as it can be expensive and time-consuming. However, if the dispute is serious and you cannot come to an agreement, going to court may be your only option. If you are considering taking the dispute to court, you should speak to a lawyer to get advice on the best course of action.
Consider Selling the Company
If the dispute is affecting the company’s running and you cannot resolve it, you may need to consider selling the business. This can be a difficult decision, but sometimes it is the best option for all parties involved. If you sell the company, ensure you get professional advice on how to do this in a way that is fair to all shareholders.
Final words
There are a few options available to shareholders who are in dispute. If the situation cannot be resolved between the parties, it may be necessary to take legal action or sell the company. However, before taking any drastic measures, it is always advisable to seek professional advice. With the right guidance, shareholder disputes can often be resolved without difficulty.
For more information and trusted legal advice regarding shareholder disputes and other corporate matters, get in touch with us at Saanichton Law Group. Our team of experienced business lawyers is here to help you protect your rights as a shareholder. Give us a call at 2505440727or email us at info@saanichtonlaw.com today, and we will be happy to assist you with all your legal needs.
