How Should A Business Handle A Shareholder Dispute?
Due to close work proximity, shareholder disputes disrupt the working order of businesses, often causing more problems than necessary. In fact, a shareholder dispute may influence company profit and reputation. Therefore, solving a shareholder dispute quickly and efficiently is of utmost importance.
Shareholder disputes take different forms, whether a deadlock or a derivative action. Consequently, a shareholder dispute lawyer knows how to advise a business in each of these circumstances. We also provide examples of such situations with possible solutions below.
Types of Shareholder Disputes
Problem: When the decision-making authority splits evenly between 2, 4, or 6 individuals, a deadlock may occur when the vote is split equally in the middle because no one has the deciding vote.
Solution: Rather than only one solution at the disposal of a business, a couple of options are available to businesses with a board of directors.
- appoint an odd number of directors to the board
- establish tie-breaking procedures in the bylaws or operating agreement
- restructure the company by buying out one of the shareholders
- consult with a business lawyer for the best solution for your company
Problem: The controlling majority shareholders attempt to manipulate a business in their own self-interest by also oppressing minority shareholders or self-dealing funds to self or a related company.
- watering down ownership interest
- withholding distributions and employment
- refusing certain benefits
Solution: Pennsylvania law obligates directors and majority shareholders to certain fiduciary duties to all shareholders, even minority shareholders who have no control in the actual business. Therefore, participating in any type of shareholder oppression is against the law and a minority shareholder may seek legal counsel for dealing with this type of shareholder dispute.
Shareholder derivative actions
Problem: Company managers refuse or fail to act on behalf of the business in a way that could negatively influence the business on a whole.
Solution: First of all, a minority shareholder proves that a derivative action is in the best interest of the company. Moreover, a derivative action may be against one of the managers or against a third party that the management did not pursue. Therefore, after significant proof has been provided, a minority shareholder may bring legal action on the behalf of the company against the company managers that have failed to serve the company as they ought to.
Stock sale or redemption
Problem: A dispute or disagreement between shareholders that results in a deadlock or inability to move the company forward.
Solution: In some companies, forced buyout provisions have been outlined in the bylaws, operating agreement, or the shareholders’ agreement. Consequently, based on terms in any of these agreements, a stock sale or stock redemption can occur.
stock sale – an individual purchases the company ownership units
stock redemption – the company itself purchases ownership units
The shareholder dispute lawyers at Kraemer, Manes & Associates stand ready to mediate any type of shareholder dispute a business might be dealing with. Moreover, a lawyer recognizes what options best solve a volatile dispute between majority and minority shareholders. Call or email us because we know what to do for your shareholder dispute or how to prevent future shareholder disputes.