Preventing shareholder disputes before they happen

Preventing shareholder disputes before they happen

| Jul 10, 2020 | Dispute Resolution

Companies of all sizes have shareholders voting on important decisions affecting the company. Disputes among these shareholders can cause a major disruption to business operations. Large companies often have many shareholders, each with an opportunity to vote on important matters. This helps balance out disputes. Large companies also often have procedures in place for the resolution of such disputes. Small and medium-sized companies do not always share these advantages. So how can they prevent shareholder disputes from interfering with the success of their business?

A solid shareholder agreement

Most business owners already know that a shareholder agreement is an important part of any business plan. What they may not know is how to use that agreement to prevent shareholder disagreements, or to at least provide a path to resolving differences peacefully. A strong shareholder agreement should address the following issues:

  • The sale and transfer of shares- The agreement should describe details regarding how shares are valued, sold or transferred to others.
  • The role of capital contributions- All shareholders should have a clear understanding of their role in providing capital contributions to the company, as well as what happens if they cannot contribute.
  • Details regarding meetings- Shareholders should know when and how meetings take place. They should all be aware of quorum requirements for votes and their right to information about important matters.
  • Rights of minority shareholders- The majority often rules in the boardroom, but that may not be best. Sometimes minority shareholders have legal rights. In addition, building a broader agreement can help prevent litigation and costly disputes.
  • Ending a shareholder’s participation- The agreement should clearly lay out a plan for what happens if the company must bring a shareholder’s involvement to an end. Reasons for this could include the shareholder’s death or bankruptcy. Everyone should also understand when the company can buy out a shareholder.
  • Dispute resolution- The agreement should lay out a method for resolving the disputes so that the process is already in place any time a triggering event occurs.

Of course, a shareholder agreement is only one of many functioning documents that keep your business running smoothly. Every contract and governing document should work together toward a common goal that upholds your company’s principles and core mission. Consistency and clear communication regarding roles and expectations will help prevent many disputes before they happen.