Breaking Up Your Company: Why Shareholder Disputes Take Place

What is a shareholder dispute or, in other words, shareholder oppression? The terms “shareholder dispute” and “shareholder oppression” are short hand references to business disputes between two or more owners of closely held businesses. Although the phrases both refer to “shareholders” they are used interchangeably by most people to refer to disputes between owners of not only corporations, but between owners of partnerships and limited liability companies. There are important distinctions between the various business entities that can be used, but those are beyond the scope of this introduction.

In a closely held business there are often several shareholders/partners who decided to go into business together. They can be relatives, close friends or even just business acquaintances who realized that they could combine their efforts and make a go of a new business. In many cases there is an inside partner and an outside partner. The inside partner typically is responsible for the production and fulfillment operations of the business while the outside partner is responsible for promoting the business and securing orders for the businesses goods and/or services. Sometimes a business is started by one person with a vision, but they want to share their success with others who have helped them out, when the business founder decides that he or she wants to give those individuals a chance to share in the growth and prosperity of the company, they do so by giving them stock in the company. Other times the founder opens up the ownership of the business to others in an effort to raise capital to help take the business to the next level. Whichever scenario, or even any other scenario that hasn’t been mentioned, there is the very real potential for disputes to develop over, among other things, the management of the business, the direction of the business, the level of effort being expended by owners, the compensation being paid or lack of profits to distribute.

Any of these disputes can blossom into full-fledged, to the death litigation contests, pitting partners, and their respective wills, against each other. Often times the dispute erupts over perceived slights or resentment that has festered beneath the surface for months or even years. These disputes can, and do, usually lead to the breakup of the business relationship. One owner may be compelled to sell his or her interest to the other owner at a price determined through a valuation process. In rare cases the sale of the business to a third party may be forced.

Shareholder disputes are akin to a business divorce and can be just as nasty and contentious as the marital divorce, with each side remembering ancient slights and using them to fan the passions of the dispute. With high stakes in play, including the future ownership and operation of a successful business, it is important to fully understand your rights as a shareholder/business owner and to adequately protect them. It is critical not only in a dispute, however; good legal advice and counsel can result in the drafting of various agreements among the business owners designed to help minimize the risks of such disputes by planning for situations before they arise.

Published on:

Comments are closed.

Contact Information