Inside: A medicine for every ailment, remedies in shareholder disputes

A shareholder dispute can have many causes and, appropriately enough, there are just as many possible solutions

Finding the right remedy for a shareholder dispute can be quite difficult. After all, there are many possible remedies out there, and the exact circumstances of each case are going to be slightly different, making it more difficult to find the right remedy for a specific case. Understanding the vast number of options out there is essential for reaching the optimal outcome for your client or business.

One key thing to remember is that the remedy need not be drastic. A change in the shareholder agreement, or amending the bylaws to require a supermajority for certain corporate actions may be enough to smooth over the existing problem. On the other hand, by working out an agreement between themselves, the parties will be able to avoid the uncertainty that comes with litigation and will have a chance to reach a remedy that both parties can live with, and that can go a long way to reducing the amount of tension between the parties.

If not, and the case goes to court, then, in most states, at least, courts are empowered with a broad range of possible remedies short of ordering a buyout or a corporate dissolution. Examples of what a court can do include rescinding any actions made by the majority of shareholders that are deemed to be unfair to the minority, ordering a comprehensive audit of the company, forcing the payment of dividends to shareholders, preventing alterations to the bylaws or articles of incorporation, and awarding monetary damages for the termination of a shareholder who was also working as an employee, among many other possible remedies. The main problem with these court-ordered remedies, of course, is that a court imposing any of these on a corporation may not resolve the root cause of the dissension, and while the remedies may be able to keep the corporation going in the short-term, which is no small concern, of course, but will likely need further negotiation between the parties to resolve the dispute for good.

A buyout of a shareholder, or shareholders, may be the best solution if the dispute appears to be intractable. What form the buyout takes will depend on a variety of circumstances. If the buyout is voluntary, and not court-ordered, then the parties will have the ability to negotiate between themselves for the terms of the buyout including, if necessary the hiring and use of a valuation expert.

In certain cases, however, the buyout will come in the form of a court order. Because of the nature of this process, whereby a court is essentially forcing one party to exit the partnership on terms not of its own choosing, most states have statutory regulations that regulate under what circumstances a court can order an involuntary buyout, and the procedures that must be followed in order to effectuate the buyout. Issues of valuation often arise as well, and those will be discussed with more specificity in the final article of this series.

The most extreme remedy, of course, is the dissolution of the corporation. Like with buyouts, a corporate dissolution can be either voluntary or involuntary. As far as voluntary dissolutions go, in certain cases, most notably where there is a deadlock among directors, and neither faction has the resources and/or desire to buy the other party out, nor has the desire to be bought out. In other cases, the specific facts on the ground may make the dissolution of a company more preferable to the majority shareholders than continuing to fight minority shareholders. It is worth noting, however, that many shareholder agreements will prohibit the majority shareholders from any such voluntary dissolution, in order to protect the rights of the minority shareholders. Courts will generally enforce these agreements, preventing voluntary dissolutions in such cases.

In other cases, the dissolution will come by court order. In general, courts are often reluctant to order a forcible dissolution of the corporation, as such a remedy will necessarily create a huge disruption in the operation in the business even if one of the parties is able to quickly set up a new corporation to purchase the assets of the old. There are also costs associated with winding up the corporation as well. Like with involuntary buyouts, because of both the drastic nature of the remedy and issues of fairness, there are a variety of statutory schemes in effect designed to regulate when parties can request an involuntary dissolution, when courts can grant those requests, and the procedures for doing so.

One other important issue to consider when deciding how to handle a shareholder dispute is to consider what remedies will be available to the court. In Illinois, the relevant statute gives judges a very long list of possible remedies they can order, and then backstops those options by also allowing them to take any other legal or equitable measures they find appropriate. Illinois, however, is considered to be a “shareholder-friendly” jurisdiction, and other states place more restrictions on the types of remedies their courts can order. Knowing the limits of a court’s power to grant relief going in can be a great help in getting a favorable outcome in a shareholder dispute.

A shareholder dispute can have many causes and, appropriately enough, there are just as many possible solutions. Knowing which remedy is right for a particular situation is absolutely critical for getting the best outcome in this type of case. When the future of the company is on the line, as it often is when shareholders fight amongst themselves, having a full set of tools to fix these broken-down relationships can be the most important thing of all.

Contributing Author

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Thomas Patterson

Thomas E. Patterson started the Patterson Law Firm in 2000. He has 32 years of experience preparing and trying lawsuits for businesses, professionals and entrepreneurs—often...

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