Top 5 reasons for stockholder disputes

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stockholder disputes

There are different types of stakeholders in a company. They may be friends and family members with just a modest hold, to people with a massive stake in the business. Any stakeholder, however, is a source of dispute — no matter how large or small the hold is. Stockholder disputes, if not managed well, quickly turn ugly. 

As companies grow, shares change hands and stockholders’ interests swerve. It is not rare for stockholders to start disputes against one another. While they have the option to resolve disagreements informally, in some cases, stockholders will be left with no choice but to protect their interests through business litigation matters in court. 

From small businesses with two owners, to larger companies with several stockholders, the following are the top five reasons that lead to disputes:

  1. Direction of Business

There is bound to be differences of opinion on how things are running and where they ought to go. Some stakeholders may wish to close shop when others want to continue ahead. 

Other things that cause disputes in the direction of the business include: big asset purchases, debt intake, hire and fire of staff, and how decisions are made and handled. An aspect of management that reduces or increases the value of stockholders’ investment will lead to disputes.

  1. Fiduciary Matters

All stockholders in a company owe a duty to act in the company’s best interests. This is a fiduciary duty in the heart of the business model. The business exists as a stand-alone entity regardless of its stockholders. 

Fiduciary is usually at the heart of many stockholders’ disputes. Stockholders have a fiduciary duty to each other and the company, regardless of their official positions in the business. The obligations to each other, which include honesty, loyalty, and candor with regards to business comes first. 

  1. Majority Versus Minority Dispute
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A business that encompasses minority and majority shareholders — it is common for them to have disputes. The minority are at a disadvantage because they are squeezed out in votes and when it comes to make decisions. 

Minority stockholders see those majority ones don’t take their interests into account. They feel they are unfairly prejudiced by the actions of the majority. 

Minorities’ interests are typically limited in terms of the transfer of stocks. So, the majority may limit the minority in say as they run the company.  

Company decisions that impact one side to the detriment of others are commonly solved through litigation.

  1. Alterations In Compensation Or Contribution

Every stockholder should be compensated in a system that is fair and commensurate with their experience, training, and industry. Disputes happen when stockholders pay is disparate for no apparent reason. 

Differences in stockholders’ contributions, whether monetary or equity is also a source of dispute. Especially if one stockholder is seen not to contribute their fair share.

For those reasons, stockholders’ agreements should have complex provisions concerning amount, time, and discretionary nature of compensation or distribution. 

  1. Breach of Agreement

Any action from either stockholder that runs afoul of the terms and conditions of the stockholder agreement will result in a dispute. For example, when a stockholder sells or transfers shares without regard to provisions of restricted shares. 

When an agreement spells out the responsibilities of a stockholder — a failure by the other party to observe is a breach. This dispute leads to litigation.

Get Legal Help during the Formation of a Company

To reduce the chances of a business dispute, get legal help during the formation of a company. Even if your business is already operational, but without protections in place to prevent disagreements, it’s not late to get legal help. As soon as a dispute arises, seek professional legal advice. An attorney will help find the ideal way forward to come to a quick, amicable resolution that puts the company on a firmer foot.

The impact of stockholder disputes will have grave consequences for a business, that it is very important companies avoid disagreements at all costs. Work with a business litigation person to help avoid stockholder disputes.

The best way to prevent stockholder disputes is to have a strong and well-drafted shareholder agreement in place from the start. When stockholders are involved in the day-to-day operations of the company, it is likely to create additional conflict. The more closely involved each stockholder is with operations, the greater the potential for conflict.

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