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Shareholders Disputes: Common Causes and Protective Measures

Shareholder litigation is very common.

Shareholder dispute claims are typically classified as either dissenting shareholder actions or minority oppression actions. Some of the most common events triggering shareholder disputes include:

  • Deceptive practices
  • Diversion of income
  • Involuntary dissolution of a business
  • Non-payment of distributions
  • Breach of contract.
  • not invited to general meetings or otherwise squeezed out of management anticipation
  • allotments of share For no discernible purpose or otherwise resulting in unfair dilution of minority share value
  • a failure to consult the complainant or to provide information;
  • misappropriation of company business or assets;
  • mismanagement of internal company affairs;
  • failure to pay reasonable dividends.

Protective measures

Shareholders in private companies often endeavour to protect themselves from future abuses and oppressions through shareholder’s agreement.

Theoretically, shareholders who feel stiffled by their majority counterparts or the management of the company have many statutory protections which provide a vast array of remedies.

―it would be impossible and wholly undesirable to define the circumstances in which the application of equitable principles might make it unjust or inequitable (or unfair) for a party to insist on legal rights or to exercise them in a particular way ― 

Lord Hoffmann in O‘Neill vs Phillips, (1999) 2 BCLC 1

Ex-ante protections

Minority shareholders can seek to protect themselves against misuses of majority rule by bargaining for express protections in the articles of association or in separate shareholders’ agreements.

With experience, many shareholders disputes become identifiable as recurring instances. With our advice, shareholders can contemplate and agree in advance how the business will be conducted and conflicts will be resolved in future, and seek to anticipate and address likely problems insofar as these can be foreseen.

Carefully drafted incorporation agreements, partnership agreements, articles of association, and shareholder agreements can go a long way towards avoiding problems. Some of the rights that could be protected ex-ante in your shareholders’ agreement are:

  • preemption rights
  • tag-along rights
  • observer rights 
  • entrenchment of management
  • reserved matters, veto rights
  • information rights

Ex-ante contracting even addresses detailed exit provisions giving rise to a contractual right to exit on fair terms in defined events.