Avoiding shareholder disputes is important for your business but, as we’ve stated, no business is immune. The more hands in the pot, the more opinions, visions, and goals will differentiate. As Oklahoma businesses grow, the paths each shareholder or owner is on can diverge and create tension.
If these disputes are unavoidable, the next step is to prepare for what’s to come. Understanding various dispute resolution tactics and the potential damages is an important element of sustaining the business or at least mitigating liability for those involved.
Buyout or Sale of Shares
The most amicable resolution is generally going to be a shareholder opting out of the partnership by selling their shares either to another current shareholder or to a third party who will assume their role and responsibilities. This is preferred to the alternative of filing litigation and having the courts or an arbitrator settle the issue.
A buyout, termination, or simple sale of shares should be outlined in your company’s bylaws early on in the formation process. This prevents minor issues from devolving into crippling litigation. With litigation, there are additional damages in play that the parties would need to settle before this is a reasonable compromise.
Shareholder Litigation
Litigation isn’t always avoidable. Shareholders’ rights are defined by state and federal law as well as the terms of your company’s operating documents. Shareholder oppression, derivative lawsuits, and shareholder inspection violations are common litigious issues among shareholders.
In the case of shareholder oppression, a minority shareholder is claiming other shareholders or owners are making rules and decisions that box them out unfairly. This includes situations where meetings are intentionally held when the shareholder is unavailable, shifting funds unnecessarily to lower dividends owed to one or more shareholders, or any rule or action that purposefully and unfairly supports some shareholders over others. In this case, damages are not always the end result. Instead, the courts may simply order the offenders to cease any action that oppresses other shareholders or even appoint a receiver to protect shareholder interests. A court-ordered dissolution is rare but possible in these cases.
Derivative lawsuits occur when one or more shareholders believe the company’s directors or owners have failed to uphold their duties. These lawsuits will name the directors or owners in question, but the resulting damages stay within the company. Shareholders benefit from these suits in two parts: 1. The court orders the action to stop or be reversed and 2. The damages or proceeds of the suit going back into the company often means more money available for shareholder derivative payments.
For shareholder inspection violations, the damage lies in the refusal to uphold a shareholder’s right to access company records. The shareholder in question is owed the right to access financial and accounting records, minutes from shareholder meetings, and other pertinent information to ensure their rights are not being violated and that company is being run appropriately. Any directors or shareholders who stand in the way of those rights will be held directly liable by the court.
Your company’s bylaws may require mediation (non-legally binding) or arbitration (legally binding) instead of opting for litigation. You should review your company’s bylaws before proceeding with a lawsuit to avoid costing yourself and your claim in the process.
Dissolution of the Company
As we noted above, certain shareholder litigation can result in the court ordering the dissolution of the business. Normally, this only occurs if the judge determines that the actions of the company’s directors or owners are incessant and have caused irreparable harm to the company and its shareholders.
However, we want to highlight this as a possibility to stress the importance of acting in the best interests of your company, your shareholders, and the company bylaws. At HB Law Partners, we have over 20 years of experience handling commercial and business litigation. Our goal is to get the best outcome for our clients in their given circumstances. Contact our team if you are facing litigation or believe you need to file to defend your rights.
HB Law Partners
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