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Issues That Can Cause Shareholder Disputes to End Up in Litigation

As companies grow, shares change hands and shareholders’ interests begin to diverge, it is not unusual for co-owners to end up squaring off against one another in contentious disputes. While it is often in all parties’ best interests to resolve these disputes informally, in some cases shareholders will be left with little choice but to protect their interests through litigation.

From small businesses with two owners to larger companies with multiple shareholders, the following are all common examples of disputes that can lead to individual shareholders and groups of shareholders facing off against one another in court:

Common Issues in Shareholder Litigation

1. Breach of Fiduciary Duty

All shareholders in a corporation owe a duty to act in the company’s best interests. This “fiduciary duty” is at the heart of the corporate model (where the corporation exists as a stand-alone entity independent of its shareholders), and is also at the heart of many shareholder disputes.

2. Conflict of Interest Transactions

One specific example of a breach of fiduciary duty is engaging in a conflict-of-interest transaction. The law prohibits shareholders from putting their interests ahead of the company’s in corporate dealings, and transactions that benefit shareholders to the detriment of the company will often underpin contentious shareholder disputes.

3. Breach of a Shareholder Agreement

Shareholder agreements define co-owners’ rights and obligations, and along with bylaws and Articles of Incorporation constitute one of the primary governing documents of any properly-formed corporation. Exceeding a shareholder’s authority and failing to make required contributions are just two of the many shareholder agreement breaches that can lead to litigation.

4. Majority-Minority Disputes

When certain shareholders control a corporation’s decisions, shareholders in the minority may feel as though their voice is not being heard – and that they are being harmed as a result. Corporate decisions that benefit majority shareholders to the detriment of minority shareholders are commonly resolved through litigation as well.

5. Dividend Disputes

Shareholder agreements often include complex provisions regarding the amount, timing and discretionary nature of dividend distributions. Shareholders who believe that a corporation’s funds should be reinvested for growth may need to initiate litigation to protect the company (a derivative lawsuit), while shareholders who believe that their dividends have been wrongfully withheld may need to take action to protect themselves.

What Does Your Shareholder Agreement Say About Dispute Resolution?

Before initiating shareholder lawsuit, it is critical to review the terms of your shareholder agreement. Shareholder agreements commonly include dispute resolution provisions that require certain types of disagreements to be submitted to mediation or arbitration. The enforceability of these provisions is often subject to question as well, and shareholders must make informed decisions about how and where to protect their rights in order to limit the costs (both financial and practical) involved.

Contact Fort Lauderdale Business Litigation Attorney Michael Feinstein

Michael Feinstein and the other attorneys at Michael L. Feinstein, P.A. bring decades of experience to protecting shareholders’ and corporations’ interests in shareholder disputes and derivative litigation. To discuss your situation in confidence, call (954) 767-9662 or request an initial consultation online today.