Shareholders in a closely held corporation can have significant legal disputes that may disrupt the business over matters such as strategic direction, finances, and management decisions. Disputes more frequently arise when one shareholder or a group of affiliated shareholders owns a majority of the stock, which may cause minority shareholders to feel excluded from decision-making. But how can shareholder agreements prevent disputes between majority and minority shareholders or between shareholders and corporate officers and directors?
Common Causes of Shareholder Disputes
Some of the most frequent triggers of shareholder disputes include:
- Disagreements over strategic objectives or management style
- Unequal contributions of time, capital, or resources, or perceived shortcomings in contributions below what a party purportedly promised
- Financial disputes over whether to reinvest profits or distribute dividends
- Conflicts over selling shares to new investors, thereby diluting the equity of current owners
- Disputes over proposed transfers of shares
Key Provisions in Shareholder Agreements That Prevent Disputes
A shareholder agreement can establish the respective rights and obligations of every shareholder who signs the agreement. Various provisions of shareholder agreements can help eliminate the risks of disputes among shareholders. Some of the key provisions of agreements that can prevent future shareholder disputes include:
- Roles and Responsibilities – A shareholder agreement can describe each partner’s duties to the business or the scope of unilateral decision-making authority that shareholders holding officer roles have. Spelling out rights and responsibilities can help eliminate ambiguity that can lead to disagreements among owners.
- Voting Rights and Decision-Making Authority – The shareholder agreement can work with the corporation’s bylaws to outline how owners will make major or minor decisions, including implementing protections that prevent oppression of minority shareholders.
- Transfer Restrictions – Shareholders can agree to various restrictions on their ability to transfer or sell their shares, which can prevent unknown parties from acquiring stakes in the business. Transfer restrictions can also include rights of first offer or first refusal that allow current shareholders to buy out partners.
- Profit Distribution Rules – Shareholder agreements can specify the circumstances under which the corporation will distribute profits, such as by setting financial benchmarks or requiring reinvestment of profits up to a threshold, which can eliminate disputes over whether to reinvest profits or issue dividends.
- Dispute Resolution Mechanisms – A shareholder agreement may require owners to submit disputes to mediation or arbitration for resolution. Alternatively, an agreement may utilize other dispute resolution mechanisms to break deadlocks among shareholders, such as buy-sell agreements. Having defined dispute resolution processes can avoid potentially costly litigation when shareholder disputes arise.
Benefits of Having a Shareholder Agreement
Creating a shareholder agreement for your business can offer various benefits, including:
- Preserving relationships and trust among shareholders in a closely held corporation
- Establishing a defined process for handling and resolving shareholder disputes
- Protecting minority shareholder rights and preventing future oppression by majority shareholders or company managers
- Avoiding costly and time-consuming disruptions to business operations or legal expenses incurred to resolve shareholder disputes through litigation
Corporations can ensure their shareholder agreements most effectively reduce the risks of disputes among shareholders by working with experienced corporate counsel. Using “one-size-fits-all” solutions or legal templates can lead to unintended consequences when provisions do not reflect the realities of the corporation’s circumstances or the shareholders’ needs and goals.
Contact a Corporate Law Attorney Today
A shareholder agreement can establish rights and obligations for corporate stockholders, potentially reducing the risk of legal disputes among business owners or investors. Contact August Law, PLLC, today for a confidential consultation to learn more about the benefits of having a shareholder agreement to prevent future disputes between shareholders or between shareholders and management.