Protecting Your Business

What leads to shareholder disputes?

On Behalf of | Jan 6, 2023 | Business Litigation |

As owners of a corporation, shareholders have important interests in the governance and success of the organization. Their role in the business is often quite limited, however. They rely on directors and officers to make key decisions, oversee the growth of the business and chart a solid course for its success.

Shareholders have the ability to bring lawsuits (called derivative lawsuits) on behalf of the corporation against the business directors and officers. Minority shareholders may also pursue claims against majority shareholders.

These conflicts can arise for any number of reasons. Some of the most common grounds include:

  • Breach of fiduciary duty: Directors and officers have a fiduciary duty toward shareholders. They must act diligently to protect and advance the interests of the shareholders (including minority shareholders). When they breach that duty, they can be held personally liable. Breach of fiduciary duty claims often involve conflicts of interest or failure to conduct due diligence.
  • Shareholder agreements: These agreements protect the rights and interests of shareholders. Disputes can arise when shareholders allege that business leaders failed to fulfill their obligations under the agreement or are otherwise in breach. Additionally, gray areas in the language of the agreement can lead to disputes over its interpretation and application.
  • Business direction: Shareholder disputes may involve a major change in direction – for example, getting taken over by another business or ceasing operations. While directors and officers have a significant degree of leeway in exercising their business judgment, they must do so in a way that doesn’t abrogate their responsibilities toward shareholders. Minority shareholders in particular may feel that their interests aren’t being adequately protected.

Shareholder disputes often take a costly toll on the success and reputation of the business. Effective legal counsel can go a long way toward resolving shareholder disputes before they lead to litigation – or preventing them in the first place.