Common Reasons Why Shareholders Disputes Occur
29 Apr 2020
Shareholder disputes can cripple a business. Continuity may be disrupted when shareholders fall out and every day operations affected. This can also do untold damage to the reputation of the business and the perception of the brand, whether as a result of the business’ failure to deliver products or services to a high standard or when conflict spills over into interactions with clients and customers. Given the potential for disaster in any shareholder dispute they are always best avoided. Fundamental to this is understanding why shareholder disputes occur in the first place.
Why do shareholder disputes happen?
- A breach of the shareholder agreement.
Shareholders exist in many different types, from those who are very experienced in corporate procedure to others who have limited understanding of what’s involved. A breach of the shareholder agreement is a common reason for disputes to arise. The breach could be something as a simple as a misunderstanding over confidentiality requirements in the agreement. Or it could be an intentional breach, such as selling shares to a rival or competitor against the explicit terms set out in the agreement.
- Shareholders who don’t pull their weight.
If some shareholders feel that they are putting more into the business than others then problems can arise. This is particularly so where one shareholder, for whatever reason, stops working with the business.
- Disputes over the direction of the business.
This is most common where the shareholders are part of a small, close-knit group for example within a family business. However, it’s an issue that can potentially affect any organisation. When shareholders disagree over the direction the business should be taking conflict is often inevitable. This could arise from firing an employee, a large capital purchase being made or a decision to bring operations to an end, for example.
- Issues with money.
Many shareholder disputes are triggered by disagreements over the payment of dividends. This may be especially so where shareholders are receiving dividends at different levels.
- Illegal or fraudulent activities.
Where the board is concerned that shareholders have engaged in illegal or fraudulent activities this can result in serious disagreements that may significantly impact on the reputation of the business.
- A lack of fair treatment.
Problems most often arise in this context between majority and minority shareholders. Minority shareholders are naturally disadvantaged as they hold fewer shares and so will have less control over the company. Many key decisions can be taken by majority shareholders and those who have less than 50% or less than 25% of the shares may find their interests being ignored. A shareholder agreement can provide some mitigation for this, for example by ensuring that certain decisions, such as appointing directors or taking on new borrowing, require the approval of all shareholders.
- Conflicts of interest.
Conflicts can make shareholder relationships difficult, for example where a shareholder-director oversteps their authority in order to protect their own interests or has a direct interest in a contract with the business that has not been declared.
Whatever the cause of a shareholder dispute it’s always preferable to take steps to resolve any issues as quickly as possible.