No business is immune to disputes among shareholders or owners. They disrupt business and often involve emotional issues that can take a toll on everyone, especially in smaller companies.
You need to get ahead of the common issues that lead to these disputes, often result in litigation, and can cripple even the strongest business, such as:
- Shareholder oppression lawsuits
- Shareholder derivative lawsuits
- Shareholder inspection lawsuits
- Breach of contract or breach of fiduciary duty
- Equity or compensatory disputes
- Dissolution proceedings
So, what should you be doing today to prevent the disputes of tomorrow?
Establish and Enforce Rock-Solid Organizational Documents
If you just read that and don’t already have confidence in your organizational documents, such as shareholder agreements, operating agreements, or by-laws, it’s time to change that. These documents can dictate the rights and responsibilities of owners and management. Establishing these in writing quells some issues before they even begin.
Here are several items that are often addressed in solid organizational documents:
- Capital contribution requirements of shareholders or owners
- Distribution, sale, transfer, repurchasing of stocks/shares
- Designation of officers, managers, board members, or other roles
- Authority of shareholders or owners
- Authority of officers or managers
- Access to company information and documents, including financial information
- Dispute resolution procedures
- Confidentiality, non-compete, non-solicitation, and anti-raiding clauses
The appropriate organizational documents will look different for each company and depend on factors like the number of shareholders, size of the company, goals of the company, etc. It’s important to work with your attorney to prepare and review these documents (and update them from time to time!).
Effective communication is the backbone of many companies. Owners should be consistently involved in ongoing efforts to reach company goals and any changes in direction, responsibilities, or desires within the company.
Both majority and minority ownership interests should be addressed on an ongoing basis. Their interests may change and some owners may have a new or changed vision for the company. Surprises or unmet expectations are often fertile ground for disputes. Communicating before these evolving interests devolve into litigation is imperative.
Employ Sound Record-Keeping Measures
When disputes arise among shareholders or owners, a common first step is a demand to inspect the company books and records, such as financial records, operating or shareholder agreements, and other documents relevant to the operations of the company. Trust us – we’ve sent many such demands on the front of a dispute.
Because of the right to inspect books and records, companies should employ effective record-keeping at all times. This includes organizing and updating agreements, financial records, and other documents over time and ensuring the applicable documents are reflective of the current state of affairs.
Again, surprises or unmet expectations can lead to disputes. Maintaining sound records within a company often serves as a preventative measure or can help resolve issues before they escalate to litigation.
Work With an Experienced Business Attorney
We often get contacted when things go awry for a company, and we are certainly ready to help in those situations. By that point, however, it is usually too late to address issues within a company’s organizational documents. That is why we recommend that businesses work with an experienced attorney at the time of formation and on an ongoing basis. That way, if you ever find yourself involved in a dispute, the path through it can be clearer, easier, and less expensive. At HB Law Partners, we work with some of the best business attorneys in the field to ensure clients minimize the risk of disputes. But when it comes time to fight for our clients, that is when we excel. Contact our team if you need to ensure your rights are fully protected, or if you need some direction on how to avoid potentially crippling business disputes.
HB Law Partners
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