Shareholder Dispute Lawyers
A business of any size may involve shareholders or owners who have disputes. Small and mid-sized businesses are especially prone to developing major issues as a result of disputes that arise in close working relationships. Working in close proximity with other significant stakeholders is a recipe for conflict in some situations. Conflict among shareholders or owners can arise in several ways.
Types of Shareholder Disputes and Problems
Businesses deal with a lot of people management, from the business owners to the clients. Conflict within the company shareholders can spell disaster for the survival of a business. When problems arise, a business might need to figure out how to handle management deadlock, shareholder oppression, shareholder derivative action, or stock sale or redemption.
One way that owners and managers can become embroiled in a conflict is when deadlock occurs. Deadlock means that the decision makers are split on an important decision. This commonly happens when decision-making authority is split evenly between 2, 4, or 6 individuals.
The best way to address deadlock is to foresee possible issues in advance and distribute authority in a way that makes deadlock less likely. Appointing 3 or 5 directors to the board will be inherently more stable for long-term management than appointing 2 or 4 directors. However, we understand that sometimes that isn’t possible. An alternative involves building tie-breaking procedures into the company’s organizing documents. The bylaws or operating agreement can specify how deadlock will be broken when important disagreements arise.
When deadlock does occur, it may be necessary to restructure the company by buying out one or more owners so that the company can move forward. However, a decision of this magnitude should only be made after consulting with an experienced business attorney.
Options to Avoid Deadlock
- Odd number of directors
- Tie-breaking procedures
- Company restructure
- Owner buy out
Under Pennsylvania law, the directors and majority shareholders of closely-held corporations owe fiduciary duties to the shareholders generally and to minority shareholders who do not control the business. The controlling majority owners are not permitted to use their authority to oppress the minority owners. Situations involving oppression arise whenever the majority owners attempt to manipulate the business in a way that unfairly favors their interests over the interests of their partners.
Some oppression comes in the form of blatant self-dealing. A controlling majority shareholder might use his or her authority to direct company funds to himself or to a related company. Sometimes oppression involves watering down the ownership interest of the minority partners. Other forms include freezing out or squeezing out by withholding distributions, employment, or other benefits in an attempt to force the minority owners out of the business.
Options to Avoid Shareholder Oppression: Derivative Action
Minority shareholders sometimes have the option of bringing legal action on behalf of the company when the company managers fail or refuse to act reasonably on their own. A derivative action might be against one of the directors or managers directly, or against some third party that management refuses to pursue. The minority shareholder must show that the action is in the best interests of the company in order to bring an action in the name of the company.
- Legal action against director
- Prove legal action is necessary
Stock Sale or Stock Redemption
A stock sale is when company ownership is sold to an individual, and a stock redemption is when the company buys the ownership units back itself. Either transaction may arise because the parties voluntarily agree on terms or because a forced-buyout provision is triggered.
Forced buyout provisions in the bylaws, operating agreement, or shareholders’ agreement can be written in an infinite number of customized ways. When considering including a forced buyout provision, it is important to seek the advice of legal counsel to ensure that anything included in the ultimate document furthers the goals of the business.
Businesses restructure by bringing in new owners, buying out current owners, or changing ownership in some other way.
Having a litigation defense plan in place can decrease your damages and increase your ability to avoid a bigger problem in your business.
Kraemer, Manes & Associates LLC “KM&A” is a law firm serving all of Pennsylvania with our principal offices in Pittsburgh and Philadelphia. Call KM&A in western Pennsylvania at 412-626-5626 or in eastern Pennsylvania at 215-618-9185. KM&A can be reached by email at email@example.com.