Four Common Shareholder Disputes and How to Avoid Them

Shareholder agreements sit at the very core of the business they serve, but the temptation to dodge this step for the sake of time and money will always be there when a business’s founders or directors have a strong, longstanding relationship. This is particularly true when shareholders are related but needn’t always be the case.

Plenty of factors can, however, lead to a significant dispute between shareholders – and, in turn, a significant disruption to the business in lieu of a clear and incontrovertible agreement, signed by all involved. Working out how to work well with family, for instance, is a difficult process, even when your relationships are strong.

Below, we look at some of the most common causes of these disputes, and how to ensure you won’t run into them (however strong your existing relationships are).

Direction

An unspoken agreement between friends or relatives may feel sufficient when the business is new and small but, as it starts to grow more successful, it is common for disagreements to arise over the business’s direction and future.

A shareholder agreement anticipates these disagreements and lays out a clear procedure for reaching a general consensus on these matters.

Money and/or power

Disagreements can arise over any number of issues, big or small – particularly when you and your shareholders have relationships outside of the business itself. But, for obvious reasons, two of the most common causes of disagreement are money and power or influence over the business.

Again, disagreements like this may not seem likely when you’re overseeing a fledgling business, but a growing profit or influence within your industry makes the stakes higher, and, potentially, agreements fewer and farther between.

Value

This is all too common, and goes hand in hand with the previous issue. Shareholders do not always agree over the company’s value, and this can cause an impasse that negatively impacts the business’s growth and development.

Departure

Eventually, a shareholder may decide to give up their shares and leave their position at the company. When that time comes, however, they may value their shares significantly higher than the rest of the shareholders believe them to be worth – or can comfortably afford. This is a regrettable situation but, ultimately, avoidable.

How to avoid shareholder disputes

The key to avoiding these disputes, whether now or twenty years down the line, is to seek legal advice from the outset, long before any of these disputes even feel as though they could be on the cards.

This is because corporate solicitors understand exactly what a business needs to keep it healthy, regardless of how well you know and trust your fellow shareholders, and they will be able to offer impartial and practical legal advice on matters such as the shareholder agreement, and strategic advice for the short- and long-term. They can help you to establish clear policies on distributing profits, salaries, or consulting fees. With these policies agreed upon sooner rather than later, it will be much harder for a disgruntled shareholder to make an allegation about inappropriate payment of dividends, salaries, and consulting fees and, as a result, avoid those calamitous disagreements over money.

Also – and this is something your solicitor will advise you on – make sure you are keeping detailed records and evidence (such as financial information through an accountant) as possible, in case of a dispute further down the line.

Finally, start succession planning early so that the business’s future is always secured, and that unforeseen circumstances don’t derail a once strong strategy.

Remember that it often boils down to strong communication, and that the proper legal safeguards will always be better complemented by an open approach to discussing the business’s health and strategy.