Shareholder disputes are unfortunately all too common. If a shareholder's rights are violated, the shareholder may file a lawsuit requesting compensation. Shareholder disputes can be costly for a company because it can disrupt business operations and affect a company's reputation. As a company grows, there may be disagreements over how ownership should change or how company funds should be managed.
When shareholder disputes arise, you may need the assistance of legal counsel to guide you through the process and advocate on your behalf to ensure a fair and just remedy. The partners at Kim & Feliz, LLC have the experience and knowledge necessary to help deliver a positive outcome in shareholder disputes. We thoroughly review your case. We take a comprehensive approach and strategically advocate on your behalf.
The Nature of Shareholder Disputes in New Jersey
Disputes can arise for any given reason. The following, however, are some of the more common examples of shareholder disputes:
- Failure to pay dividends
- Self-dealing, e.g., when a member of a corporation diverts corporate funds for personal use.
- Breach of fiduciary duty
- Breach of contract
- Fraud and constructive fraud
- Failure to disclose financial information
- Oppressive conduct by majority shareholders against minority shareholders
- Termination of a shareholder's employment.
Shareholder disputes can affect any type of business owned by more than one individual. Even in a partnership of only two people who are running a business, business partners may have different opinions about hiring practices and how profits from the business should be distributed. Many shareholder disputes involve minority and majority shareholders.
A breach of fiduciary duty may occur when an individual acts out of self-interest rather than doing what is best for the company and other shareholders. A fiduciary duty arises when an individual is in a position of trust within a company. In a business context, fiduciaries are required to act in good faith and have a duty of loyalty to the company. A breach of fiduciary duty may occur, for example, if a member of the company shares confidential information with a competitor.
Oppressive conduct against minority shareholders may occur when majority shareholders refuse to pay minority shareholders their share of a company's profits or treat other shareholders unfairly. Oppression may also occur when majority shareholders act as though they exclusively own the company without sharing information vital to business operations with minority shareholders. Holding meetings without notifying minority shareholders or making decisions about the business without allowing minority shareholders to participate may constitute oppression.
New Jersey Shareholder Agreements
Shareholders are legally afforded some protection without an agreement according to state statutes, but a shareholder agreement is an additional way that a company can protect shareholders and establish expectations about what will happen in the event of a dispute. There are specific provisions that can protect or guide shareholder disputes.
Provisions on Shareholder Departures
Shareholder agreements can cover a wide range of topics, e.g., what will happen when a shareholder leaves the company or passes away. This type of provision in a shareholder agreement can protect the interests of the remaining shareholders. Many shareholder agreements state that the remaining shareholders shall have the first option to purchase an interest in the company if a shareholder leaves.
Dispute Resolution Provisions
A shareholder agreement may also state how a dispute may be resolved. There may be provisions in a shareholder agreement about how the value of a company will be evaluated if one member of the company wants to buy out another shareholder's interest.
Some agreements have arbitration clauses which state that if a dispute arises, the parties must submit their case to an arbitrator rather than proceeding with traditional litigation. A case that is resolved through arbitration cannot be appealed, and the decision made by the arbitrator is binding. An advantage of resolving a shareholder dispute through arbitration is that it can be less costly than traditional litigation.
Consequences of No Shareholder Agreement
If there is no shareholder agreement in place, what happens in a shareholder dispute is governed by state statutes. While New Jersey law affords shareholders some protection, many business owners find that having an agreement in writing tailored to their specific business needs is best and can help avoid future costs of litigation.
Resolving Shareholder Disputes in Bergen County
Shareholder disputes commonly arise when a member of a company wants to buy out another shareholder's stake in the company. In this scenario, business valuation may be a contested matter. An expert may be consulted to help evaluate the value of the business, which can include not only the real estate and inventory owned by the business but also the goodwill of the business and intellectual property, e.g., trademarks and copyrights.
The stakes in a shareholder dispute are often high since one or more shareholders within a company may be facing being forced out of their positions. A shareholder dispute can also cause a disruption in business operations when disagreements between shareholders prevent the business from running smoothly.
A court may temporarily order a third party, like an accountant, to take over management of the business assets. In some situations, the business itself can be at risk. A drastic remedy in shareholder dispute litigation is the dissolution of the company and the sale of all business assets. Usually, this can be avoided with successful negotiation.
Negotiation & Settlements
Many cases are settled through mediation, which is an out-of-court session where the parties in a lawsuit discuss their requests with a mediator and attempt to reach a settlement agreement. The parties in litigation are often asked to submit their summary of the facts of the dispute and their settlement demands in writing prior to the mediation session. If a shareholder dispute cannot be resolved through negotiation or mediation, the case may proceed to a trial before a judge or jury.
Whether you need to file a lawsuit or you have been served with a lawsuit by a member of your corporation, the best way to protect your interests is to speak with an attorney experienced in commercial litigation. Shareholder disputes can become quite complex due to the fact that multiple parties may be involved in litigation. A shareholder dispute can have a huge impact on a business, so it is important to ensure that you have an attorney who is knowledgeable in commercial litigation working toward a solution to resolve the dispute. If your case involves oppressive conduct by majority shareholders, an attorney can help ensure that your rights are protected.
Commercial Litigation Attorneys in New Jersey
If you have questions regarding a shareholder dispute or shareholder agreement in New Jersey, contact the attorneys at Kim & Feliz, LLC. We are located conveniently in Fort Lee and represent clients throughout Bergen County. You can contact us online or call (201) 585-2250.