Shareholders of your company may file litigation over various issues or disputes. One potential source of shareholder litigation is the valuation of your company and that valuation’s effects on the fair price of shareholders’ business interests or shares during a buyout, merger, or acquisition. Fortunately, there are certain proactive steps you can take to protect your company and your interests under these circumstances.
Common Triggers for Valuation Disputes
Some of the most frequent circumstances in which parties must litigate the issue of corporate valuation include:
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Disagreements between shareholders or between minority shareholders and management during buyouts, partner/investor exists, or mergers and acquisitions
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Allegations of mismanagement or inaccurate reporting by directors and officers
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Shareholder oppression claims where minority shareholders seek a fair market buyout of their interests
Initial Steps to Protect Your Business
Take the following steps to protect your company in the event shareholders initiate litigation.
Preserving financial records
Company managers should secure copies of all financial statements, communications between departments, future projections, and valuation reports. These documents can become evidence in future litigation over corporate valuation. Furthermore, managers should develop a document management plan to prevent inadvertent destruction or deletion of potentially relevant financial records, which could lead to accusations of spoliation of evidence and harm the company’s position in litigation.
Limiting internal disruption
Managers should also begin limiting the communication of essential business information to company leadership while balancing these efforts with the maintenance of normal business operations. Any internal or external disruptions can adversely affect the company’s valuation.
Legal Strategies for Reducing Business Risk
Below are some additional critical strategies that companies can implement to manage or mitigate their legal risk during litigation over corporate valuation in shareholder claims:
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Retaining business appraisers and financial experts : Companies should hire independent professionals (including accountants, financial analysts, and expert business appraisers) to help them develop arguments for litigation over corporate valuation. In many cases, expert reports can serve as key evidence in corporate valuation litigation, as courts may find one side’s experts more credible than the other’s and rely on that opinion to decide the case.
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Utilizing corporate governance tools : Companies should ensure they keep detailed records of their corporate governance, including maintaining board minutes and records of corporate resolutions. Business leaders may also have other rights or mechanisms for resolving valuation disputes, including corporate bylaws, shareholder agreements, and buy-sell rights.
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Pursuing alternative dispute resolution : Companies may avoid costly, time-consuming litigation by using methods such as mediation, referring valuation disputes to mutually selected financial experts, or arbitration.
Managing Communication and Confidentiality
Companies facing shareholder litigation need a comprehensive communication plan that addresses both internal communication with stakeholders (such as employees, directors, or shareholders not involved in the litigation) and external communication with customers, suppliers, business partners, and the public. During litigation, companies should protect any financial data shared during discovery through non-disclosure agreements or court-issued protective orders. Any leaks of the company’s confidential financial data can adversely affect its valuation.
Mitigating Financial and Operational Consequences
Finally, corporate leaders should manage the financial or operational challenges posed by shareholder litigation and valuation disputes. They can do so by reviewing cash flow projections to budget for legal expenses and assessing the effects of litigation on the company’s relationships with lenders and outside investors.
Contact a Michigan Business Law Attorney Today
Are shareholders in your business initiating litigation over your company’s valuation? If so, contact August Law, PLLC today for a confidential consultation with a Michigan business lawyer to learn more about what you can do to protect your business’s interests during shareholder litigation.