Common shareholder disputes and how to solve them

On Behalf of | Jan 24, 2023 | Firm News

Majority shareholders and top-level executives are usually responsible for making major decisions regarding the running of a business, as they own the major stake in the company. Still, the minority shareholders have rights, and it is not uncommon for disputes to arise between majority and minority shareholders due to reasons like those explained below.

Corporate self-dealing

This occurs when a board member or majority shareholder takes advantage of their position to push their interests, often to the detriment of the company. Large payouts to the board of directors or dividend payouts to majority shareholders when the company is taking losses is an example of self-dealing, which can lead to disputes with disgruntled minority shareholders.

Breach of fiduciary duty or shareholder oppression

Corporate officers and managers are responsible for acting in the interests of shareholders and the company. Failure to do so is defined as a breach of fiduciary duty, which can be a source of dispute. This breach can also occur between majority and minority shareholders if the former fails to act in the interests of the latter. Wrongful efforts to force out minority shareholders, impeding the voting process or not disclosing conflict of interest are would constitute a breach of fiduciary duty.

How to resolve shareholder disputes

When there is a dispute among shareholders, the first course of action should be to read through the shareholder agreement. This document gives a clearer roadmap for moving forward as it is likely to contain provisions for dispute resolution. Checking the shareholder agreement ensures that everything is done by the book and that all parties receive fair treatment.

The members could also call a general meeting of all relevant stakeholders and provide them with a forum to air their views. Transparent discourse may help shareholders devise a solution that favors everyone.

A buyout is also a way out for disgruntled shareholders who wish to end their participation in the company’s affairs. Minority shareholders can also consolidate their power by selling part of their stake to a representative on the board.

Alternatively, shareholders may call in an independent arbitrator to oversee mediation and help members reach a consensus. When all else fails, disgruntled members have the right to seek legal recourse by filing a suit for oppressive conduct in a court of law. They could also seek an injunction to prevent wrongful conduct within the company.

Winding up the company is easily the most radical action in resolving a shareholder dispute and applies as a last resort when all members cannot reach an amicable solution through the other avenues.