There are many good reasons to organize a business venture as a corporation. But by taking advantage of the corporate form, a company exposes itself to the complex, and often difficult to resolve, quagmire of shareholder disputes. In today’s article, I will briefly discuss some of the common ways a corporation can become embroiled in one of these disputes.
Shareholder disputes often occur is when an individual shareholder, or a group of shareholders, has a major disagreement with the direction of the corporation. These disputes can be caused by a wide range of problems, from personal animosity between owners to disagreement about the business plans of the corporation.
A minority shareholder may be frozen out of the corporation by the other partners. If the minority shareholder is also an employee of the company, they may be fired from that position, which is often their main source of income. Or, the majority shareholders may begin to use their power over the corporation to benefit themselves, perhaps by increasing their own compensation, at the expense of the minority shareholder. More benignly, the majority shareholders may cut the minority shareholder out of the decision-making process. In any event, the minority shareholder feels as though he has been marginalized, and, understandably, wants redress.
It may be that a shareholder wishes to divest himself of his shares and move on, but, is not free to do so because of the articles of incorporation or some other reason. A further complicating factor may be a case where the departing shareholder intends to set up a competing business once he frees himself of his fiduciary duties. In that case, it can be very difficult for the parties to reach a compromise, as their goals can often appear to be directly at odds with each other. Similarly, it might be that a partner, in addition to wanting to leave the company, also wants to take a portion of the company’s business with him, often feeling that it is “his” part of the company. In either case, these disputes can be bitter and often end up badly hurting the company.
An even more dire circumstance is when two partners of a company, each holding 50 percent of the corporation, have a falling out. Not only is there the potential for litigation, but also, until the two owners can come to some sort of understanding, there is the possibility of deadlock in making major business decisions that need to be ratified by the shareholders. This can paralyze a business completely. The dispute will quickly lead to the business itself being destroyed while the partners fight.
Shareholder disputes can be dangerous for a corporation because the litigation process can be expensive, time-consuming and, depending on the circumstances, can end in a variety of remedies with serious consequences, up to and including court-ordered corporate dissolution. Compounding this difficulty is that, more than most other forms of dispute, a shareholder dispute, even if not personal at the outset, can quickly become about petty rivalries and jealousies. After all, it is common in cases as these that the litigants are long-time associates of one another who have seen their relationship degenerate into open conflict.
Ultimately, it is impossible to craft a perfect shareholder agreement that will definitely prevent any future shareholder disputes. Many shareholder disputes come about because of the inherent difficulties in any sort of enterprise that relies on cooperation. That is not to say, however, that there is nothing a business can do to try and prevent or minimize these disputes. By including provisions in a shareholders’ agreement guaranteeing minority rights in the cooperation, or by making it more difficult for a shareholder to lose their position as an employee with a company, the risk of that sort of dispute arising can be diminished. Similarly, by recognizing the possibility that any partnership may not last forever, the parties can make provisions for a future dissolution of their relationship in advance, determining things such as whether an ex-partner can take business with him, and how and to whom he can sell his stock, which can prevent costly litigation in the future.
Of course, the complexities of shareholder relations being what they are, and the fact that every company is facing its own particular set of challenges and concerns, hiring an experienced commercial lawyer can often be the difference between an amicable resolution to a shareholder dispute and a fractious litigation process that can often severely damage, if not destroy, a company.