Disagreements over the direction of a business or what to do with the profits from a company can often lead to disputes and litigation between officers, directors, shareholders, or other equity partners in a venture. These disputes can often lead to an outcome that neither side wants: unintended delays in growth because of deadlock.
Preventing a disagreement in the first place because of properly written articles of incorporation or bylaws is always the best alternative. However, no internally imposed guidelines or rules can ever foresee all possible scenarios, leading to disputes that neither side ever anticipated at the time the company was formed.
When disputes that no party could have anticipated do occur, the best outcome will obviously avoid the costs of litigation. The negotiation process will often break down, however, when the costs of litigating the dispute are significantly outweighed by the potential upside of a favorable outcome. This is why it is always critical to be represented by a litigator with significant experience handling corporate disputes. Attorney Stanley P. Lieber has represented businesses and individuals who are involved in corporate disputes since 1973 and has handled over 500 civil trials.
There are times when other disputes can arise despite clear language in bylaws, (or articles of incorporation), mandating a course of action. Litigation and disputes can arise in these situations for a variety of reasons. Individuals with a significant interest in a company may understand their weak position but still be strategically willing to use the litigation process in the hopes that the other side will back down and offer concessions.
Other times, parties develop irrational positions based on emotions or other external factors, leading to disagreements. The purpose of corporate bylaws, however, is to provide the company with guidelines to, among other things, avoid litigation.Recent decisions in many states, including Delaware, have made litigation prohibited by corporate bylaws less attractive. For example, recent rulings have held that attorneys’ fees provisions within corporate bylaws are enforceable in intra-corporate disputes.
This type of provision, when enforceable, presents a real change when considering litigation based on a shareholder dispute, as attorneys’ fees are not normally available except in cases where they were contractually provided for. Further, some states have now begun accepting choice of forum clauses in corporate bylaws to keep jurisdiction in intra-corporate disputes or disputes between shareholders.
While almost all shareholder litigation is unanticipated at early stages, common problems, or types of problems that result in shareholder litigation do arise. A common situation where corporate disputes between stakeholders in a corporation or partnership occur when minority shareholders allege that they are being treated unfairly, or more specifically, excluded from meaningful participation by the majority. While aggressive acts by the majority shareholders may be permitted by the bylaws in some instances, abuse of process by majority shareholders is not allowed and can lead to litigation.
Additional disputes arise when the bylaws are silent or do not adequately address the issues that the shareholders disagree about. The bylaws are sometimes also unclear as to what rights the minority shareholders have, aside from the right to vote, to ensure their interests are protected against policies designed to harm them. Another type of common dispute exists at the time of possible sales of assets or shares, when large transactions are expected to occur. Problems also arise when partners or shareholders in a business own equal shares, such as two individuals owning 50% of a given entity. A dispute among those individuals can often lead to litigation and sometimes result in a forced sale of stock or a forced sale of assets.
When a shareholder files an action against members of a board of directors, officers, or other shareholders, the matter is called a shareholder derivative suit. Officers and directors at corporations owe duties to the shareholders who have invested. Some of these duties include a duty of care, a duty to avoid conflicts of interest, and a duty of loyalty. Disputes can also arise when a shareholder alleges officers or directors objectively failed to use reasonable strategies to grow the business.
A shareholder only needs one share of stock to sue and can base his or her case on a variety of legal theories, including fraud, concealment, breach of fiduciary duty, failure to act in good faith or engage in fair dealing, or malfeasance (intentional or negligent).
Los Angeles litigation attorney Stanley P. Lieber has handled countless disputes between shareholders and directors or officers and has significant experience resolving matters while avoiding litigation. Contact us for a Free Consultation.