4 Common Causes of Shareholder Disputes
A shareholder agreement can come in handy when there are two or more shareholders in a corporation. It can cover buy-sell rights for shares, restrictions on transferring shares, voting rights, and a shareholder’s salary and employment duties. The more comprehensive your shareholder agreement, the more likely you are to prevent disputes among shareholders. To understand why the agreement is so important, consider some of the common causes of shareholder disputes.
Minority shareholders have little say in major decisionsShareholder disputes can come up when minority shareholders feel left out. They may feel that they have almost no ability to influence big decisions, or that the majority shareholders are ignoring their interests. Your agreement can include a voting clause to balance the rights of shareholders within the majority and the minority. You can stipulate unanimous consent, meaning a single shareholder can disrupt the efforts of the majority; or a supermajority vote, which would require a specific fraction or percentage of votes. You can also add clauses to specify the rights of your minority shareholders, such as their employment terms, salary and withdrawal rights, to avoid confusion and minimize minority shareholder oppression in the future.
Conflict of interestProblems can arise when a shareholder appears to have conflicting interests. For example, they may become involved in an another enterprise that competes with yours. Your shareholder agreement can specify that the company’s interests come before the shareholder’s personal interests or any other duties that the shareholder may have outside of the Company. If the language is clear enough, you can prevent a serious dispute and/or reduce any potential litigation cost in the future if the non-abiding shareholder does not comply with the shareholder agreement.
A shareholder isn’t pulling his or her weightWhen a shareholder, director, or executive neglects to fulfill his or her fiduciary duty, other shareholders can rightfully become resentful. They may feel that the other shareholder does not contribute enough time or effort to your enterprise. Your shareholder agreement legally binds each participant to certain duties. It can specify exactly what is expected of each shareholder, including how many hours per week they must work, or it can simply include a general statement requires binds all shareholders to devote their best efforts to the company.
A disagreement can’t be resolvedSometimes shareholders will not be able to resolve their dispute, whether it’s because of irreconcilable differences, diverging visions of what’s best for the company, or allegations of misconduct. A shareholder agreement will need provisions for this. You can provide for a compulsory buyout, allowing either party to buy out the other, along with a formula for the buyout price. Your agreement should also include an arbitration clause to avoid the long and expensive court process.