Shareholder disputes often arise because of conflicts between majority and minority stockholders, allegations of fraud or misconduct committed by officers and directors, breach of fiduciary duty claims, dissolutions of corporations, business valuation issues, and merger and acquisition disputes.
Minority shareholder oppression claims
Most shareholder disputes involve unhappy minority shareholders. Because majority shareholders control the corporation affairs by voting for their directors and choosing their own officers, minority shareholders may feel at a disadvantage for having no voice in how a business entity is run. Minority shareholders might feel that the majority shareholders, who control the purse of the business entity through their directors and officers, are using corporate funds for personal purposes or paying their officers more than what is necessary.
Although you can hold talks with the majority shareholders on your own, at some point you will see that they will only take you seriously when you are represented by a shareholder disputes attorney.
Under New York Business Corporation Code (BSC) § 1104-a, a minority shareholder controlling 20% or more of the shares may seek dissolution of the corporation on the ground that the controlling shareholders are defrauding or oppressing the minority shareholders or wasting, looting, or diverting corporate assets for non-corporate purposes.
Even if you don’t own 20% of the company, you still have the remedy of filing a derivative suit in the name of the corporation under NY BSC § 626 when you suspect that these majority shareholders, directors, or officers are committing actions that are prejudicial to corporate interests.
Breach of fiduciary duty claims
Directors and officers are fiduciaries who owe duties of care, loyalty, and honesty to the corporation and its shareholders. In a close corporation, majority shareholders also owe a fiduciary duty to the minority shareholders. These fiduciaries owe a duty of care to act as a reasonable and prudent person would act. In a corporate setting, it requires the fiduciary to exercise informed business judgment in the conduct of business operations.
The duty of honesty requires fiduciaries to disclose material information that may harm or affect the business or individual that is owed that duty.
The duty of loyalty requires the fiduciary to always act in the best interests of the party owed that duty, even if it means sacrificing his own personal interest.
For example, an officer of the corporation has a duty of care to the directors, the corporation, and its stockholders, to sell corporate assets within market value. If the officer plans to sell corporate assets to himself, even if it is within market value, the officer has the duty of honesty to tell the corporation and stockholders of this plan. The officer cannot sell below market value corporate assets to himself because the officer has a fiduciary duty to act in the best interests of the corporation, even if it means sacrificing his own personal interest.
Minority shareholders can file claims for breaches of fiduciary duties against these officers and directors. A shareholder disputes attorney can assist you in evaluating the strength and weakness of your breach of fiduciary claim.
Business valuation disputes
When a minority shareholder is unhappy being and staying a shareholder in the corporation, they may request the majority shareholders to buy out his shares. At this point, issues normally arise regarding the valuation of the business, where the majority shareholder would offer a buyout that the minority shareholder would feel to be insufficient.
There are several ways to value a business. First, one may add up all the assets to arrive at the business value. This, however, does not take into consideration the goodwill, revenue, and earnings of the business.
Another way to value the business is to base it on the earnings of the company. For example, if the net profit of the company is $300,000 for a particular year and it has 3000 shares, then the value of each share is $100. Some people use a discounted cash flow analysis to value a company. It uses the company’s annual cash flow and projects this for a number of years then discounts it to get the net present value. A shareholder disputes attorney will be able to help you negotiate the best business appraisal valuation method for your shares.
Because a lot of businesses are incorporated in New York, shareholder disputes are common. The best way to prevent or avoid shareholder disputes is to have a detailed shareholder agreement that will outline the duties and obligations of the shareholders, how shares will be bought, sold, or transferred, if there are restrictions in the transfer of shares, right of first refusal of the existing shareholders to purchase shares before being sold to third parties, dispute resolution procedures, declaration of dividends, tag-along and drag-along rights for shareholders, and procedures for appointing or removing directors, holding board meetings, obtaining management information, banking arrangements, inspection of corporate books, and other important financial details.
Ideally, a well-drafted shareholder agreement would determine everyone’s rights. If you are in a dispute with no shareholder agreement in place, or the existing shareholder agreement is not clear, a shareholder disputes attorney can advise you or even speak to the other shareholders on your behalf to ensure that the other shareholders and officers understand you are serious in your claims and you will resort to litigation if your issues are not resolved.
If you are involved in a shareholder dispute, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.