Business owners can choose from many different formation structures when incorporating their company. While some select partnerships or limited liability companies (LLCs), others form a corporation, such as a “C” or “S” corp instead. One main difference between corporations and other business structures is that the former has shareholders who are essentially investors in the company.
Shareholders enjoy many rights for their investment, which afford them a certain degree of leverage if a dispute arises.
Shareholder rights
Shareholder rights are generally spelled out in a company’s bylaws or a shareholder agreement. It’s common for shareholders to have voting rights similar to the board of directors, which may allow them to authorize various business initiatives, including:
- Sale of corporate assets
- Approval of corporate bylaws
- Addition or reduction of the board of director panelists
- Removal of corporate involvement limits
- Approval of ownership rules for shares
Some companies prefer to retain a small number of shareholders, while others have larger controlling groups. The more shareholders there are, the higher the likelihood of dissension among members or even the board of directors.
Board members have a responsibility, known as a fiduciary duty, to make choices in a company’s best financial interests. A company’s bylaws may authorize shareholders to remove poorly-performing board members or ones that have conflicts of interest. Board members must disclose when there may be any potential conflict of interest that may affect their ability to make financial choices that are in a company’s best interests.
Common shareholder disputes
Shareholders often pursue shareholder derivative lawsuits on behalf of a corporation. Typically filed against someone on a company’s leadership team, such as a corporate officer or member of the board of directors, allegations can include:
- Unreasonable executive-level compensation
- Evidence of insider trading
- Financial impropriety, such as accounting discrepancies or reporting errors
- Corporate governance issues or waste
- Suspected self-dealing
Solutions for resolving shareholder disputes
Shareholder agreements often detail the methods by which disputes are resolved. Some of the more common approaches include forcing minority shareholders to sell off their shares or seeking mediation in an attempt to achieve a compromise among parties.
Litigation is generally the last resort shareholders, or a board of directors pursues in resolving disputes as it can be a costly and time-consuming option. That said, escalating legal action to litigation can occur if shareholder agreements fail to define what should happen if a dispute arises.
