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The top 3 reasons why shareholder disputes occur

The owners of a public company, its shareholders, can be individual people, institutions, or other corporations. Each of these parties must abide by a shareholder agreement. 

Shareholders and company directors aren’t generally the same. Shareholders typically don’t manage a corporation’s day-to-day operations; however, they maintain oversight over business operations. This oversight of financial matters and governance ensures that their investment in the company is protected. 

As with any parties involved in any contractual relationship, disputes may arise. In the corporate context, these conflicts often involve executive teams and shareholders. Three of the more common reasons shareholder disputes emerge are highlighted below. 

1. Friction between majority and minority shareholders

Public companies generally have two types of shareholders, majority and minority ones. The former retains ownership of 50% or more of the shares, and the latter can own as little as a single share. Inequity in the ownership of shares between majority and minority shareholders can lead to potential disputes. 

2. Concerns over executives upholding their fiduciary duty

The concept of fiduciary duty means that a company’s executive team and its board of directors must put a corporation’s welfare ahead of their personal preferences. One example of a violation of a corporate executive’s fiduciary duty is if they make decisions that involve a conflict of interest. A dispute may arise if shareholders believe that a company executive or board member is not making optimal choices, as this approach can affect a company’s profitability. 

3. Non-compliance with contract terms and conditions

A shareholder agreement outlines the information that the executive team and board of directors must provide to company owners. One critical piece of information that shareholders have a right to is company financial records. Disputes often arise because company leadership isn’t forthcoming with the records the shareholder agreement requires them to turn over. 

Disputes may also arise because a corporation’s executive team deviates from other agreement terms and conditions regarding: 

  • Board composition
  • Capital structuring
  • Dividend policies 

Conflicts may also arise because shareholders believe that a company’s executive team deviated from established business plans.

Approaches commonly used to resolve shareholder disputes

  • Resolution via mediation or arbitration: Contractual clauses requiring this dispute resolution option often spell out whose vote counts if there’s a 50:50 decision and someone needs to break the tie
  • Allow for shareholder buyout or departures: If there’s an impassible dispute between company leadership and shareholders majority owners may buy out minority shares. This purchase may allow minor shareholders unhappy with where things stand to receive compensation to terminate their relationship with the corporation.

The shareholder agreement generally clarifies how shareholders and executive teams should resolve conflicts.