According to the International Finance Corporation (IFC), about 20 percent of legal company-related disputes settled by the International Chamber of Commerce (ICC) involve corporate governance. Examples of corporate governance issues include the valuation of shares, shareholder disputes, the lack of shareholder participation in decision-making, and much more. Shareholder disputes in Florida can lead to time-consuming (and expensive) litigation, and this can impede business operations. As a result, it is in the best interests of all parties to resolve these disputes as quickly and effectively as possible. Even though different shareholders might not agree on certain subjects, they should all mutually benefit from the success of the company. Business litigation attorneys in Clearwater may be able to help parties resolve these disputes so that the company can get back to its main goal: Generating returns for the shareholders. To expand on this subject, consider contacting Clearwater Business Law at (727) 502-6874. Aside from Clearwater, we also serve clients in Tarpon Springs, Palm Harbor, Dunedin, New Port Richey, Pinellas Park, Oldsmar, and St. Petersburg.
Why Do Shareholder Disputes Occur?
Shareholder disputes may occur for various reasons. For executives and business leaders who want to resolve these disputes as effectively as possible, the obvious first step is to determine the root cause of the issue. Often, the catalyst for a shareholder dispute is more complex and subtle than it might appear at face value. Shareholders are frequently influenced not only by the logical realities of business, but also by emotional factors. The complete list of potential shareholder disputes is extensive, but some are more common than others:
Disputes Involving Corporate Dissolution and Liquidation
Shareholder disputes often arise during corporate liquidation and dissolution. When a company begins to fail, there are two main options: Either dissolve the business completely or file for Chapter 11 bankruptcy. While the latter option may lead to the survival of the company, both pathways inevitably trigger the liquidation of assets. Asset liquidation affects shareholders in many ways, especially during corporate dissolution. Asset sales facilitate the repayment of debts, and shareholders represent the “lowest-ranking” creditors during this process. In other words, creditors receive the cash value of their shares last during dissolution – and this can lead to significant disputes.
Some shareholders might question whether the failure of the company is really an inevitability, or whether there is still a chance for survival via Chapter 11 bankruptcy. The latter choice may be particularly attractive for low-ranking shareholders who want to preserve the cash value of their investments. Some shareholders may sue the company for mismanagement, negligence, and general ineptitude, claiming that these mistakes led to the unnecessary failure of the company. These claims may take the form of “breach of contract” or “breach of fiduciary duty” lawsuits.
Disputes Over Decision-Making Processes
One of the key benefits of becoming a shareholder is the right to control the major decision-making processes of a company. Aside from non-voting shares, each share provides the shareholder with a degree of voting power. If shareholders feel excluded from this decision-making process despite their right to participate, they may take legal action. This may occur if all shareholders feel powerless in comparison to the board of directors, the executives, and other leaders (including “outside directors” who hold no shares). However, shareholders might also argue among themselves about major decisions. For example, minority shareholders might sue the majority shareholders. Alternatively, owners of “common shares” may argue with other shareholders with additional privileges – such as increased voting rights.
When minority shareholders do not agree with the business decisions made by majority shareholders, this is called “shareholder oppression.” However, this phrase also refers to a range of other potential issues – including disputes over dividend withholding, share dilution, and much more. According to the Florida Bar, shareholder oppression can be particularly problematic in “close corporations” when there is no market for the sale of the shares. With no way to sell, there is no exit route for these minority shareholders – leaving them with little choice but to pursue litigation. In these situations, shareholders may also face pressure to sell their shares at a considerable discount.
Disputes Over Alleged Fraud or Conflicts of Interest
Shareholders often become alarmed and frustrated when they gain awareness of potential fraud or conflicts of interest. Shareholders trust company leaders to act in their best interests. When this trust evaporates, disputes can quickly lead to litigation. In this situation, the shareholders may only feel confident about exploring their allegations in court, where a neutral judge will examine the facts. They may be far less reassured when navigating internal dispute resolution strategies like arbitration, which makes these types of shareholder disputes particularly dangerous for companies. That being said, effective shareholder agreements almost always compel parties to attempt alternative dispute resolution (ADR) before proceeding to court. Clearwater Business Law may be able to help parties review or draft these shareholder agreements.
Fraud or conflicts of interest can take many forms in corporations. Many of these issues revolve around dividends, and one example is the payment of “preferential dividends” to certain shareholders. Company leadership might also withhold dividends from certain shareholders. A clear conflict of interest might be unjustified compensation to insiders, which could also represent a breach of fiduciary duty. Perhaps the company purchased the shares of controlling shareholders with company funds. Maybe a minority shareholder has been terminated as a director or officer for no real reason. The Florida Bar states that “any technique that reduces the cash flow of a minority shareholder” could lead to shareholder disputes and business litigation.
The Importance of ADR During Shareholder Disputes
ADR methods like arbitration represent the obvious pathway toward fast resolutions and the protection of business interests. Parties should strive to keep these disputes out of the courtroom, as litigation can harm a company in many ways. Aside from the legal costs, the company must also consider the potential reputational damage associated with a public trial. The trial may also reveal sensitive information about business operations, intellectual property, trade secrets, and so on.
Learn More About Business Litigation With Clearwater Business Law
While there may be a few universal rules and widely applicable strategies when it comes to business litigation, each shareholder dispute is slightly different. Although shareholders often argue about similar subjects, these disputes are characterized by the unique personalities of the parties involved. Some may be more stubborn, while others could be open to compromise. Sometimes, litigation is impossible due to these factors. In other cases, alternative dispute resolutions such as arbitration could save the company from a time-consuming trial. Whatever the case may be, shareholders and business leaders may want to take the next step beyond online research by working with an experienced business litigation attorney in Clearwater. Continue this conversation by contacting Clearwater Business Law at (727) 502-6874.