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3 shareholder disputes that might end up in court

On Behalf of | Apr 12, 2024 | Business Litigation

Running a business is an exciting venture, but even the most successful companies can face internal disagreements. When disagreements involve shareholders, the stakes can be particularly high.

While some disputes can be resolved through negotiation, others reach a point where litigation may become necessary. As such, if you help to run a corporation, you should familiarize yourself with shareholder disputes that might require a trip to court.

Deadlocks in management decisions

A healthy business thrives on effective decision-making. However, with multiple shareholders, disagreements on strategic direction, financial investments or hiring practices can lead to impasses. In closely held corporations with equal ownership, these deadlocks can be particularly crippling.

Litigation can help break such impasses. A court can order the sale of the company, force the buy-out of a dissenting shareholder or appoint a temporary decision-maker. Litigation may provide a solution when communication and compromise fail.

Disputes regarding shareholder agreements (buy-sell provisions)

Buy-sell provisions are crucial documents outlining the process for shareholders to exit the company. These agreements typically define the conditions and valuation methods for buying or selling shares. Disputes can arise regarding:

  • The interpretation of these provisions
  • The triggering events for a buy-out
  • The fair market value of the shares

Litigation can help clarify the terms of the agreement and enforce its provisions. A court ruling can determine the appropriate valuation of shares, the timeframe for a buy-out or even declare the buy-sell provision unenforceable.

Dilution and squeeze-outs

Share dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. Squeeze-outs, on the other hand, are intentional attempts by majority shareholders to force minority shareholders to sell their shares at an unfair price.

Both scenarios can lead to litigation if minority shareholders believe their ownership rights are being unfairly diminished. A lawsuit might seek to challenge the issuance of new shares, prevent a squeeze-out or obtain a fair valuation for the minority shareholder’s stake.

Shareholder disputes can be disruptive and expensive. Having clear and well-drafted shareholder agreements, operating agreements and bylaws can help prevent some conflicts. However, consulting with a reliable legal remains important if communication breaks down and litigation becomes unavoidable. There is simply too much at stake for corporations to risk an unfavorable outcome to such disputes.