You are currently viewing Closely Held Corporation Shareholder Disputes

Closely Held Corporation Shareholder Disputes

Shareholders of small businesses may experience the best and worst of business ownership. A tight-knit group of people who work well together can drive a business to success. A small group of business owners can also become entangled in petty disputes, personality conflicts, and fundamental disagreements on what a business should do. The dark side of business ownership can result in shareholder disputes, a company frozen in conflict, and the parties battling in court.

What Is A Close Corporation?

A close corporation has no ready market to trade its shares. Shares aren’t publicly traded on a stock exchange, and the public can’t buy them. A few shareholders or investors who may be heavily involved in managing the business’ daily operations own the shares.

Family members may have owned company shares for generations. It may also be a new business with little more than a great idea and some capital as a business shareholder lawyer knows all too well.

What Might Cause Disputes Between Shareholders?

Disputes can arise when the business isn’t going to plan and having a rough time competing in the marketplace. As Focus Law LA will share, some dispute might be:

  • One or several shareholders may want to push another out of the business
  • There may be a clash in how to operate the business or what it should do in the future
  • One shareholder may feel others are trying to “freeze” them out of their right to have a say
  • A shareholder may want to leave for personal reasons or due to disputes over the company’s direction and may depart to start a competitor, taking some customers with them
  • A shareholder may need to leave a company because they pass away or become disabled, and remaining shareholders can’t agree on what to do next
  • The company may be in the crossfire of shareholding family members’ disputes over personal or family matters

When a minority of owners disagree about how to manage the company or who should lead the business, the route to a resolution may be clouded by personal and emotional conflicts. If emotions run hot, by-laws and shareholder agreements may not be enough to end a management deadlock.

What Are A Close Corporation’s Shareholder’s Duties?

Stockholders owe each other a duty of loyalty and utmost good faith. A controlling shareholder can’t take a damaging, oppressive course of action if an alternative would be less harmful to minority shareholders. Minority shareholders may be protected by state law because they can’t sell their stock and escape oppressive behavior by controlling shareholders.

A Court’s Decision May Be Legally Sound But Bad For The Business

Usually, the parties come to their senses and understand they’re threatening the existence of something they all care about – the business. Other times, some shareholders are willing to burn the company to the ground if they don’t get their way.

What resolution finally breaks the logjam may be based on how much good faith exists between the parties (negotiation or mediation may be the solution), or differences may be resolved in court if relationships break down. Going to court may result in a legally well-grounded order that might not lead to the company’s financial success. The result in some cases is dissolving the corporation and liquidating its assets.

If you’re part of a close corporation or are thinking of starting one with others, a well-written ownership agreement may prevent disputes from disrupting the business. Speak with an experienced business attorney about an agreement accommodating your plans and concerns.