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Navigating shareholder disputes: from those who know

Shareholder conflicts can happen for a variety of reasons, including a dispute over the company’s management and direction, shareholders not doing their part or no longer working with the firm, personal issues affecting business relationships, conflicts of interest (lack of) dividend payouts, breach of a director’s service contract, or uncertainty about whether any or all members of the board are acting in the best interest of the company.

Often, disgruntled shareholders will try to take over the business for themselves or have the other members removed from the board.

Disputes frequently get worse as a result of the lack of early legal advice and the inability to understand which choices and tactics are best.

Expelling a partner

According to Crestlegal.com there are a few options available when expelling a partner from a partnership:

Check the Partnership Agreement

If a Partnership Agreement exists, it should provide partners guidance on how to handle any expulsion. In the absence of a formal partnership agreement, the Partnership Act 1890’s basic provisions may apply unless otherwise agreed by the parties.

There are no laws that enable a partner to be dismissed, so these clauses should be included in the partnership agreement explicitly (a compelling incentive not to wait until you lose your entire investment!).

If you don’t have an agreement in place, the legal position may be that the only way a partner can be removed is through the partnership’s dissolution.

This may not be what the participants want. A partnership agreement will give partners complete control over any exclusions without requiring them to go to the default position in the Partnership Act.  

Expelling a Partner

If you believe a partner should be removed from your firm, you must follow the partnership agreement and the expulsion clause meticulously. If it says that you must meet with the partner before any removal, for example, then you should do so.

Also, keep in mind that the expulsion of one partner effects the partnership as well, since you’ll need to handle the settlement of the expelled partner’s stocks, earnings, and equity. The terms of payment must be agreed, as must how the payment will be made if the collaboration is to continue.

Expulsion Clauses

Typically, partnership agreements include provisions regarding disputes and the resolution of conflicts. The first step in any dispute should be taken here. If there is no dispute resolution, a well-written partnership agreement will lay out the groundwork for how a partner may be kicked out.

The list includes:

  • Criminal behaviour
  • Insolvency/bankruptcy
  • Material breach of the terms of the agreement
  • Misconduct
  • Dishonesty
  • Permanent Incapacity

The withdrawal clause in the agreement should always describe how and when a partner will be kicked out. The usual procedure is for partners to receive a notice of expulsion, followed by a suspension period.

So, what are the common causes of shareholder disputes?

According to tremblylaw.com, the five most common shareholder disputes are:

Breach of the Shareholder Agreement

Breaches might be as severe as a shareholder selling their shares in violation of the agreement, especially if they do so to a rival or competitor. Other examples of breaches include one investor wanting to withdraw from the partnership against the will of other investors.

Disagreements Over Direction

This is a frequent cause of shareholder conflict, particularly in small family firms that are closely held. A decision to move the company in a new direction or even a choice to cease operations might trigger a shareholder protest. Other issues that could lead to disputes include firing or letting go of non-shareholder staff, major purchases or outlays of money, and selling or leasing property.

Fiduciary Misdeeds

Shareholders in privately owned businesses have a fiduciary duty to one another, regardless of whether they are working for the company. Shareholders are obligated at a minimum to deal with each other in an open and honest manner, with loyalty and candor. In dealing with minority shareholders, majority owners are particularly under an obligation to be candid and loyal.

Minority Shareholders Getting No Respect

Minority shareholders in private corporations face an uphill battle from the start since they own fewer shares than the majority owners and may have little power to effect substantial change.

However, many states recognize and protect minority shareholders’ rights, who are frequently excluded from managerial and decision making. Because the stock is not marketable to others, many minority investors may find that their investments are trapped and at the disposal of majority stockholders who have no interest in seeing them prosper.

Differences in Compensation or Contribution

Shareholder workers should be paid fairly and in line with their experience, training, and industry. When this does not happen, and employees are compensated at different rates for no apparent reason other than family connection, conflict will arise.

Differences in shareholders’ contributions, either financial or sweat equity, might also cause conflict, especially if one investor is perceived to be not giving their fair share.