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4 causes of shareholder disputes

On Behalf of | Oct 3, 2023 | Business Litigation |

Your company’s shareholders can influence its direction due to their powers and rights. Thus, it’s crucial to be on the same page with them. But, at times, disputes may arise between you and the shareholders or among themselves.

Here are four causes of shareholder disputes:

Disagreements over business direction 

This is a common cause of shareholder disputes, especially in closely held corporations (companies with a small group of shareholders) and privately held companies (companies whose shares are not publicly traded). 

When shareholders have conflicting ideas on what’s best for the company, or you disagree with their opinions, disputes may arise. If a disagreement over business direction is not solved earlier, it can escalate quickly.

Breach of contract

A shareholder agreement details the rights and responsibilities of every shareholder, their shares, transfer of shares, protections for minority shareholders, conflict resolution methods and so on. 

Shareholders should follow the terms of the agreement they signed. If one violates any of the terms, disputes can arise. For example, if a shareholder sells their shares without following the set guidelines.

Fiduciary misdeed

In most cases, shareholders don’t owe fiduciary duties to other shareholders. But this may change in closely or privately held businesses. Shareholders in such circumstances may be required to be honest with others and act in their best interest. If they fail to do so, disputes may arise.

Lack of respect towards minority shareholders

Conflicts between minority and majority shareholders are common. Minority shareholders may feel they are not respected, perhaps their opinions are not considered in decision-making. This is why it’s crucial to have protections for minority shareholders in a shareholder agreement. 

Shareholder disputes can be costly. If you find yourself in this situation, seek legal guidance to protect your company.