5 common causes of shareholder disputes and how to address them

Shareholders can attend meetings where they receive information about company operations and future plans. They can vote on certain matters to help determine the future direction of the company. When the organization is profitable, they receive dividends or a portion of the profits generated by the business.

Unfortunately, shareholder disputes can arise in a variety of circumstances. These disputes can complicate business operations and lead to litigation. The following are the most common sources of shareholder disputes, and how organizations can address them.

1. Disputes about the future of the business

Shareholders may question how the company invests its resources, strategizes for product development or plans to expand. Conflicts about the company’s future may require lengthy discussions to evaluate the impact of different options.

2. Breaches of fiduciary duties

Various parties working at the organization have a fiduciary duty to the company and also to its shareholders. They should put the best interest of the shareholders first, typically by trying to optimize organizational revenue. Mismanagement of company assets due to incompetence can lead to claims of a professional breaching their fiduciary duty. Self-dealing or embezzlement can also lead to concerns among shareholders. It may be necessary to remove or reprimand the professional who has breached their duty to resolve the issue.

3. Unequal treatment of shareholders

Shareholders typically pay the fair market value for the shares that they acquire in a business, which can fluctuate. Still, companies should do their best to ensure that contributions are relatively consistent from one shareholder to the next. They also need to ensure that they are neutral and fair when making distributions to shareholders based on their prior contributions to the organization. Transparency regarding fluctuations in share prices and proceeds distributed to shareholders can prevent disputes of this nature.

4. Infringement on minority shareholder rights

As previously mentioned, shareholders generally have a right to attend meetings, vote on critical matters and receive a fair share of profit generated by the organization based on their investments. Attempts to violate those rights by freezing out minority shareholders can lead to conflict that culminates in litigation. Executives working at a business, coalitions of shareholders or majority shareholders could violate the rights of minority shareholders. Evaluating plans to influence shareholder decisions or reacquire shares before acting on them can prevent these parties from violating the rights of minority shareholders.

5. Failing to provide a clear agreement

Shareholders typically sign agreements with the companies in which they invest. These agreements outline the obligations and rights of individual shareholders, as well as the obligations imposed on the organization. When companies do not have shareholder agreements or when they are ambiguous, generic documents, there may be unspoken expectations or confusion among shareholders. Organizations can correct this issue by expanding and clarifying existing agreements and then addressing any disputes related to the prior agreement.

Navigating shareholder disputes can be a complex and costly process. Shareholders and businesses may need legal representation as they attempt to address conflicts related to a publicly-traded business entity, and that’s okay.