In the course of any business, shareholder disputes may arise between those who hold minority and majority stakes in the company. This often occurs as a result of decisions taken by management or a board of directors. Contrary to the wishes of minority shareholders, the company could be expanding payroll, manufacturing new products and taking on new debt. Expansion of the business into a new market, from Ohio to New England, for example, could also spark controversy.
Contractual disputes among shareholders also pose a hazard to the smooth functioning of a business. If new shares are issued and the board elects not to offer an increased stake to a minority shareholder, the latter may consider it a breach of his pre-emptive contract rights. A shotgun clause that gives a shareholder the right to sell his stake can lead to a dispute over the fair market value of the shares if the original shareholder agreement didn’t specify a price.
Minority shareholders may have many different business interests. However, investment or management in another business in the same sector, or one that sells the same or very similar products, may violate a non-compete clause. Along with pre-emptive rights and shotgun clauses, non-compete agreements can easily turn a business relationship sour and even bring the disputing parties to business litigation.
In a relatively minor disagreement, mediation between the disputing parties can save the time and expense of business court. A material breach of a business contract, however, can invalidate the entire agreement and entail a tangle of competing claims and counterclaims that can only be resolved in court. This should always be the last recourse of individuals whose primary goal is to protect their investment in an ongoing business enterprise.
Source: Houston Chronicle , “Top 10 Things a Minority Shareholder Should Look Out for in a Shareholder’s Agreement“, Carolyn Williams, December 21, 2014