Shareholder disputes are very disruptive to a business. When they occur in closely held businesses, they are also very emotional. Closely held businesses have just a handful of key stakeholders, and disputes among them can quickly escalate. Disputes can also place business operations and the futures of the owners at risk.
Shareholder disputes in closely held businesses are not merely financial disagreements. They typically arise from competing visions for the business, personal frustrations, or the natural complications that stem from operating a business in which resources and authority are distributed among a few key individuals. Below, a Knoxville business litigation lawyer outlines the causes of these disputes and how to resolve them.
What Causes Shareholder Disputes in Closely Held Businesses?
Closely held businesses are unique, but they face many of the same types of disputes. Understanding the issues that are common in these companies can help you address them more effectively. The most common shareholder disputes in closely held businesses are as follows:
- Deadlocks: Many closely held businesses are governed by shareholders who also act as officers or directors. When ownership and voting power are distributed equally among shareholders, indecision can paralyze the business. Plans to expand may become stalled, large expenditures may be deferred, and a simple hiring process can go on for months. Deadlocks among shareholders may seem like typical business disputes. Over time, though, they can result in missed opportunities, increased tension, and ultimately, a business that cannot run effectively.
- Financial disputes: Financial disputes can create some of the biggest wedges between shareholders. Disputes can arise regarding whether to reinvest profits into the business to generate growth or to distribute them among shareholders. Certain shareholders may feel as though they are contributing more without seeing their fair share of dividends. Disputes over the company’s finances can erode trust and result in scrutiny over every decision made. These disputes, which may seem fairly minor at first, can escalate into a full-blown battle over control of the business.
- Oppressive conduct: Minority shareholders have a stake in a closely held business, but they do not have a great deal of voting power in how the business is run. Majority shareholders may choose to exclude minority shareholders from business decisions, and this can have serious consequences. Majority shareholders may withhold financial records, cut the dividends of minority shareholders while drawing large salaries themselves, and even reduce minority shares, limiting influence and ownership even further.
- Breach of fiduciary duty: Officers and directors in closely held businesses owe a fiduciary duty to the company and to the other shareholders. The fiduciary duty requires people in positions of power to act in the best interests of the business rather than their own. Still, breaches of fiduciary duty are extremely common, and when they arise, they often result in a lawsuit.
Regardless of the cause of your shareholder dispute, it is critical that you speak to a Knoxville business litigation lawyer as soon as they arise.
Resolving Shareholder Disputes Through Mediation
Not all shareholder disputes must escalate into a battle in the courtroom. Depending on the nature of the dispute and the ability of the involved parties to negotiate, mediation may be the best way to resolve the disagreement.
During mediation, a mediator, who is a neutral third party, fosters compromise and communication between the disputing parties. A business litigation lawyer can facilitate negotiations to reach a settlement agreement during mediation. This is far less hostile and expensive than litigation. Mediation is particularly helpful when the opposing sides want to preserve the business relationship.
Enforce Shareholder Agreements
A strong shareholder agreement is one of the best tools for resolving shareholder disputes before they escalate. A shareholder agreement should outline mechanisms for resolving deadlocks, such as veto powers, define buyout terms, and require mediation to resolve disputes. If a dispute does require litigation, the court will often first analyze the shareholder agreement to guide its decision.
Legal Protections for Minority Shareholders
The law in Tennessee provides many legal protections for minority shareholders who suffer from oppression by majority shareholders. Under the law, the courts can intervene and provide a remedy that is typically focused on the ‘reasonable expectations’ of minority shareholders.
The courts may resolve disputes between minority and controlling shareholders in a number of ways. If the minority shareholders have suffered harm, such as lost salary or dividends due to a breach of fiduciary duty, the court may order the majority shareholders to pay damages to the minority shareholders. The court may also order majority shareholders to buy out the minority shares at fair market value, allowing the minority shareholders to leave the business.
The courts may also issue injunctions to stop harmful actions, order corporate records to be inspected, or reinstate an employee-shareholder who was terminated.
As a last resort, the courts may also order the business to be dissolved and liquidated. When judicial dissolution is the only option, the court will oversee the final operations of the business, liquidate the company’s assets, and distribute the proceeds among shareholders in a manner the court deems fair.
How to Prevent Shareholder Disputes in Closely Held Businesses
It is not always possible to avoid shareholder disputes in closely held businesses, but there are some steps you can take to minimize their likelihood and impact. These include:
- Draft a strong shareholder agreement that defines share transfers, voting procedures, and dispute resolution methods.
- Hold regular shareholder meetings, provide easy access to financial records, and maintain open communication and transparency to prevent misunderstandings and build trust.
- Draft buy-sell agreements and predetermined exit strategies to provide guidance when a shareholder wishes to leave and to prevent disputes.
Our Business Litigation Lawyers in Knoxville Can Help with Your Dispute
If a shareholder dispute has disrupted your business, or you want to prevent them from occurring, our Knoxville business litigation lawyers can help. At The Ebbert Law Firm, our experienced attorneys can draft a strong shareholder agreement that will protect all owners and your business, negotiate a fair settlement and resolution when a dispute does arise, and help ensure the continued success of your business. Call us now at (865) 344-2936 or fill out our online form to schedule a consultation and to get the legal guidance you need.