Legal Guide

5 Ways to avoid Shareholder Disputes

Shareholder disputes are not only expensive, they can also have detrimental effects on the reputation and long-term viability of the corporation. It can distract company officers from important business matters. If a shareholder dispute arises that is not amicably resolved, the company may be faced with significant liability risks and financial losses.

There are many reasons that can lead to shareholder disputes, including the following:

  • Disagreements between shareholders
  • Breach of director’s duties
  • Stock transfer restrictions or forced buy-out of shares
  • Minority shareholder oppression
  • Appointment or expulsion of corporate officers and directors
  • Share or asset sale disputes
  • Fraud
  • Share dilution claims

Resolving shareholder disputes may involve negotiation, arbitration and, if all else fails, litigation. This is why prudent business owners should anticipate and prevent shareholder disputes before they occur.

Here are 5 ways to avoid shareholders disputes:

  1. Have a written agreement

No matter the size of your business, if you have more than one shareholder, you should consider having a shareholder agreement. A shareholder agreement is a written contract between two or more shareholders that sets out the respective rights and obligations of the shareholders. A well-drafted shareholder agreement can help prevent and manage disputes between shareholders, minimize risks and provide a mechanism for resolving issues.  A shareholder agreement addresses, among other things, shareholder approval of certain matters such as material changes to or sale of business, declaration or payment of dividends, borrowing arrangements, and authorizing transfer or issuance of shares. It also provides for rules regarding voting by directors and addressing future financing needs. A shareholder agreement typically includes provisions regarding the transferability of shares, and what happens when a majority of the shareholders wants to sell their shares. It provides for shareholder remedies. Consult a knowledgeable attorney who can help you prepare the written agreement. Make sure all the shareholders or their representatives are consulted and apprised on the terms of the agreements.

  1. Comply with the shareholder’s agreement provisions

The terms of the agreement should be strictly followed to avoid disputes among the shareholders. An agreement that is duly approved and signed after proper consultation binds all shareholders. If the agreement clearly defines the obligations and rights of the shareholders, then there is no need to interpret it otherwise. The agreement will serve as a guide to shareholders in case of share transfers, voting rights, or even dispute resolution. When everyone knows their legal rights and responsibilities as contained in the agreement, conflict within the corporation will be less likely.

  1. Keep records of business transactions

Keeping written records of all business transactions is always prudent corporate practice. You will realize how these records can quickly resolve shareholder questions even before a dispute arises. Corporations should practice an efficient method of keeping records. It does not only help prevent disagreements, but can also expedite dispute resolutions when they do happen. A qualified corporate lawyer will be able to give you advice on which documents to keep aside from records of shareholder meetings and bylaws.

  1. Mediation

Being proactive can help your company avoid disputes among the shareholders. This means considering mediation whenever there is a material conflict between or amongst shareholders. Diplomatic handling of all issues through mediation should be preferred instead of litigation. The trick is to allow a mediator respected by all parties involved to help them resolve the issues and concerns before tension arises.

  1. Appointment of Auditor

The mandatory appointment of an auditor is provided for under the Ontario Business Corporations Act. The appointment of an auditor will help maintain the transparency of corporate finances and operations. Shareholders who have questions or issues with the financial records of the company can verify such records with the auditor. Under the law, the auditor has the duty to examine corporate books and accounts and come up with a report.

Contact a Business Lawyer

Roberts & Obradovic Law Group’s team of qualified business and commercial law experts act as trusted business advisors for clients ranging from mid-size business to multinational corporations. Our team has a wealth of knowledge in providing practical and results-oriented strategic advice and representation in preventing and resolving shareholder disputes. Please contact us for a free initial consultation to discuss how we can assist you.

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