How Shareholder Disputes May Arise

In a private company, voting shares are typically held by a small group of individuals representing majority ownership. Minority shareholders, on the other hand, may have far smaller investments in the company.

While minority shareholders may be comfortable having little or no part in making business decisions, they do have the right to expect that management will be good stewards of their investment. It is at this intersection where many shareholder disputes arise.

Dividends

The terms of a shareholder agreement may state the circumstances under which it is appropriate to issue a dividend, such as reaching a specific profit milestone. It could also be at the discretion of management. In that case, if management decides to pay themselves a generous bonus that reduces net profit, they could justify not paying a dividend. Minority shareholders may take exception to this practice.

Inequity of efforts

Among the majority shareholders, there may be the perception that one or more of the partners contributes more time and effort to the company’s success than the others. Since shareholders usually earn financial rewards in proportion to their percentage of ownership rather than on contribution of efforts, underperforming partners may become the object of resentment.

Fraud

When a shareholder suspects company executives of committing fraud, the shareholder agreement should lay out the steps for filing a grievance. If proven, penalties for the guilty parties may include having to sell their shares.

The best defense against shareholder disputes is a clear and detailed shareholder agreement that spells out the terms and conditions of ownership and expedites conflict resolution.