6 TIPS FOR AVOIDING SHAREHOLDER DISPUTES
Shareholder disputes can arise for many reasons from disagreements over the operations of a business to claims of conflicts of interest. It is often a problem for small businesses because the more closely involved a shareholder is with operational decisions, the greater the potential for conflict. At their worst, shareholder disputes can affect the daily operations of the business as well as leave the company facing significant liability, financial losses and reputational damage. The best way to avoid these disputes is to try to plan for how to deal with them before they arise.
- HAVE A WRITTEN SHAREHOLDER AGREEMENT. No matter how small or simple your business is, problems can arise which can be more easily addressed if you have a Shareholder Agreement in place. The agreement should be in writing so there is no misunderstanding, and a qualified attorney should be consulted to advise on the best way to resolve potential issues. The agreement should address some common areas that often result in disputes, including:
- Capital contribution obligations of the owners
- Appointment and powers of officers and directors
- Restrictions on stock transfers
- Terms of stock repurchases
- Restrictions on shareholders’ participation in other business activities.
- ADDRESS MAJORITY AND MINORITY SHAREHOLDER INTERESTS. Each group has legitimate concerns, which should be balanced in the shareholder agreement. For example, majority shareholders may want adequate board representation and pro rata participation of all shareholders. While minority shareholders may look for things like the right to appoint board members and protection related to disposal of shares. When one side feels the other has an unfair advantage, it can lead to disputes.
- FOLLOW GOOD CORPORATE GOVERNANCE PRACTICES. Shareholder disputes can arise from a belief that other shareholders, directors and executives are not fulfilling their duties. Everyone should be aware of, and act in accordance with, their legal rights and responsibilities as well as rules regarding conflicts of interests.
- CONSIDER A BUYBACK OF SHARES. Through a buyback, one or more shareholders of the company may buy the shares of the person with whom there is a dispute. This can benefit all parties and allow the business to move forward.
- PROVIDE FOR DISPUTE RESOLUTION MECHANISMS. The shareholder agreement can specify the means for resolving disputes. The first step should be negotiation. If that fails, bring in an independent third-party to help. Mediation and/or arbitration can provide a good alternative to litigation. In general, the company should look to avoid litigation if possible, which is expensive, time-consuming and can affect the reputation of the business.
- SEEK PROFESSIONAL LEGAL ADVICE AS SOON AS POSSIBLE. As soon as a dispute arises, contact a qualified attorney to help find the best way to come to a quick and amicable resolution.
If you are an owner of a business and don’t yet have a Shareholder/Partnership Agreement, or are facing a potential shareholder dispute, contact us for a consultation.
To learn more about shareholder agreements, read our related post – Shareholder Agreements – Do You Need One?