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5 causes of shareholder disputes

On Behalf of | May 24, 2023 | Business Litigation

Shareholders play a significant role in a business. While they are not involved in the day-to-day running of a business, they can vote in management and have several responsibilities and duties.  

Unfortunately, shareholder disputes can arise for various reasons and can be very disruptive. While it may be best to avoid these disputes, sometimes it may not be possible. Below are some common causes of shareholder disputes.

Breach of shareholder agreements

A dispute can arise when a shareholder breaches the terms of a shareholder agreement. This can be by transferring sales in a way that contradicts the agreements or transferring the company’s resources without permission. 

Disagreements of business management and direction

In most privately held corporations, disagreements over management are common among shareholders. Something as simple as a decision over the company’s management or a choice to stop operations can trigger significant disputes. In addition, disputes can be triggered by decisions like large purchases, dismissal of non-shareholder workers and interferences like moving the business. 

A breach of fiduciary duty

The controlling shareholders have a fiduciary duty towards other shareholders. This is especially true in privately-held corporations. Therefore, the shareholders must deal with one another honestly and put the business’s interests first. That said, shareholders with conflicts of interest with other shareholders can cause significant disagreements.

Disparities in contribution or compensation

Usually, employees are paid based on their skills, experience and training. When they get paid differently for no apparent reason, disagreement will arise. Equally, disparities in responsibilities and compensation can trigger disputes among shareholders. 

Disrespecting minority shareholders’ decisions

Most privately-held corporations have two types of shareholders; majority and minority. Unfortunately, majority shareholders may not have the best interests of minority shareholders in mind. This can be because they have little say in the company’s decision-making. This kind of disrespect can trigger disputes between the two categories of shareholders. 

Shareholder disputes can cripple the current performance of vital business tasks and weaken the company’s reputation. Moreover, some issues might be complicated and require legal action. So don’t hesitate to seek legal guidance in handling shareholder disputes.