Causes of Shareholder Disputes

Shareholder disputes can be disruptive, costly and damaging to a company’s long-term success. These conflicts often arise when the interests of shareholders begin to diverge. While every business is unique, many shareholders disputes stem from a common set of issues. Understanding the triggers can help business owners to take proactive steps to minimise risk.

Top 10 Causes of Shareholder Disputes

1. Breach of Shareholder Agreements — Shareholder agreements often outline the rights, obligations and expectations of each shareholder. When one party breaches the terms, whether by selling shares without consent, failing to fulfill duties or violating voting arrangements, usually leading to significant tension and legal challenges.
2. Unequal distribution of profits or dividends — Disagreements often arise when shareholders feel that profits are not being distributed fairly, especially when majority of shareholders control dividend policies. Minority shareholders may claim oppression if they believe profits are being withheld for personal gain or to devalue their shares. Also, some disagreements may arise in relation to the allocation of profits, dividends or the retention of earnings, this causes issues mainly for the shareholders that have financial needs which arise a lot in family businesses.
3. Mismanagement or allegations of misconduct — If shareholders believe that company directors or managers are mismanaging the business, whether it is through poor financial decisions, nepotism or unethical behaviour, then conflict is likely to follow. This becomes particularly contentious if management fails to provide transparency or timely updates.
4. Lack of communication and transparency — Open communication is vital for shareholder trust. A lack of transparency around financials, strategy or decision making can create suspicion and lead to disputes. Often, the absence of clear reporting structures is the root cause of these problems.
5. Disagreements on business vision, direction or strategy — Shareholders may have different visions for the future of the company. Some may prioritise rapid growth and expansion, while others may advocate for conservative and more stable development.
6. Exit strategy conflicts — Many shareholder disputes emerge when one party exits the business and there is no clear mechanism in place to facilitate a fair buyout. Disagreements over valuation, timing or who can purchase the departing shareholder’s stake can easily lead to litigation.
7. Minority shareholder oppression — In closely held companies, minority shareholders may feel excluded from key decisions or denied access to important information. This can result in claims of unfair treatment, especially if minority shareholders act in their own interests without regard to others.
8. Deadlock between equal shareholders — When ownership is split equally, deadlocks can arise during key decisions, especially when there is no mechanism for resolution via votes. Without a resolution process, these deadlocks can strain personal relationships.
9. Changes in shareholder circumstances — Life events such as bankruptcy, divorce or death can suddenly shift the balance of shareholder power. If these transitions are not accounted for in the shareholder agreement or succession planning, then they could lead to disputes among remaining shareholders.
10. Dilution of ownership — Disputes often occur when new shares are issued, diluting the ownership of existing shareholders. If these decisions are made without full consent or transparency, then they may be perceived as self-serving or as an attempt to weaken minority influence.

Resolving Shareholder Disputes

There are many ways that shareholder disputes can be resolved. In the first instance, the shareholders will most likely engage in conducting a meeting to see whether all parties can come to an agreement, however in other cases third-party assistance may be required to resolve the dispute. Please see below ways that a third party can assist in resolving shareholder disputes:

1. Alternative Dispute Resolution including mediation — this method involves a neutral third party helping to come to a mutual agreement.
2. Arbitration — this is a more formal process where a third party makes a binding decision.
3. Litigation — this is where Court intervention may be required when all other methods have failed to resolve the dispute. This is known to be the last resort due to its costs and time involved.

Shareholder disputes can be complex and emotionally challenging, often involving personal relationships as much as legal and financial matters.

For further advice and assistance please contact our Litigation and Dispute Resolution team on 01604 344562 / 01908 916096 or email [email protected].