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How to prevent shareholder disputes

| Jun 18, 2018 | Business Law |

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No matter the size of your company, legal battles are an inevitable part of running a business. Potential sources of lawsuits include employees, investors and clients. However, this does not mean you have no power of minimizing risk. You can do well by preventing and preparing for litigation.

One of the areas in which you may experience arguments is with shareholders. Dividing up your company can help it grow but also comes with more complexity, as there are more people to please. Make the process easier with these tips.

Understand your roles and rights

Many disputes arise because each party does not fully understand its own role and rights and those of the other party. Confusion over who does what is bound to lead to contention.

Make sure you clearly know what you are responsible for and what duties lie with the other shareholders, as well as each of your rights in the event of conflict.

Recognize common causes of disputes

Lack of understanding is not the only reason for legal battles. Other common sources include the following:

  • The direction the company should go
  • Conflict of interest
  • How to handle debt
  • Performance issues of a director or shareholder
  • Payment of directors and shareholders
  • Sale of the company or a share
  • Breach of contract

Knowing what these pitfalls are is the first step in preventing them from happening.

Draft a solid agreement

Once you are aware of your roles and rights as well as potential problems, address them in your shareholder agreement.

Explicitly state the expectations for each party. Include details on daily business operations and decisions. Formulate the policies and procedures for dealing with disputes, such as votes, mediation or litigation. One of you may even choose to walk away from the business.

The approach can depend on the type of dispute. Have a business law attorney review the contract to ensure its thoroughness and validity.

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