Understanding the Repercussions of Shareholder Disputes

Although the shareholders have aligned objectives when they create or invest in a corporation, their goals may change over the life of the corporation. This commonly leads to shareholder disputes. These disputes may arise among evenly divided shareholders (50-50) or between minority and majority shareholders. Some common issues that give rise to shareholder disputes involve the control or direction of the corporation, financial difficulties, mismanagement, election of corporate officers, voluntary and involuntary dissolution, wrongdoing, or oppression of minority shareholders.

When these issues arise, it is usually very difficult for the parties involved to negotiate a resolution that will be approved by both sides. The law provides some legal options to force the involuntary dissolution of the corporation or force the majority shareholders to buy-out the minority shareholder(s). In addition, the shareholders can elect to voluntarily wind up the corporation or the shareholders can file a derivative action.

Legal Options
When shareholder disputes arise, there are some legal options available that may make the situation better or worse, which may include:

Involuntary Dissolution: In many states, minority shareholders are permitted to compel the involuntary dissolution of the corporation when the suit is filed by one-half of the directors or by the holder(s) of one-third of the shares of the corporation. The law usually excludes the shares of those who are in control of the corporation who knowingly engaged in fraud, mismanagement, or abuse of authority. If the minority shareholders have less than one-third of the shares of the corporation, it will not be fatal to their claim. If the involuntary dissolution goes forward, the court will approve and oversee the liquidation or sale of corporate assets.

Buy-Out: To avoid involuntary dissolution, the corporation or a majority (50 percent) of shareholders can elect to purchase (buy-out) the shares owned by the shareholders who initiated the involuntary dissolution process. If this option is chosen, the action for involuntary dissolution will be stayed. The parties have to reach an agreement on price; if this does not occur, the court will appoint appraisers to determine the value of the shares. After the price is set, confirmed by the court, and cash is exchanged, the involuntary dissolution proceedings will terminate.

Voluntary Dissolution: This arises when the shareholders with at least half of the voting rights vote to voluntarily dissolve the corporation. The shareholders who prefer not to dissolve the corporation can elect to buy-out the shares of the shareholders that would prefer to. Minority shareholders cannot prevent the voluntary dissolution but may seek judicial oversight of the process to ensure they get their fair share.

Derivative Actions: If the shareholders suspect that corporate funds or assets have been misappropriated to the detriment of the corporation, the individuals or officers responsible will have breached their fiduciary duty to the corporation. One shareholder on behalf of all other shareholders may file a derivative suit, which will benefit all members of the corporation.

Consult with a Business Attorney
As you can see, the impact of shareholder disputes can be detrimental to your operation, and even terminate your ability to continue to do business. If you are experiencing such a dispute, you should contact an experienced business lawyer, like a business lawyer in Washington, DC, who can help protect your rights and your business.

No matter what your business issue is, a business attorney can be there to help. Call today to schedule a confidential consultation.

Thanks to Brown Kiely LLP for their insight into the repercussions of a shareholder dispute.