Shareholder Disputes: 3 Things You Should Know Before You Start Litigation
Generally, a shareholder is someone who has invested money in exchange for a percentage or share of ownership in a company. Shareholder responsibilities and rights can differ depending on the unique circumstances. Inevitably, shareholders will have internal disputes with other shareholders, officers, directors, or even the company itself. Many of these disputes can lead to time-consuming, costly, and stressful lawsuits, otherwise known as “litigation”.?This article outlines 3 things you should know before you start litigation when facing shareholder disputes and how a lawyer can help in these situations.
Determine Your Rights and Obligations as a Shareholder
As described above, determining a shareholder’s rights is generally a fact-specific analysis. Three of the most basic shareholder rights are:
Shareholders can have different legal rights and obligations depending on the surrounding circumstances. Most commonly, this is done through issuing different types of shares that have their own bundle of rights attached to them. These rights can also be understood by reviewing the following:
In some cases, it is best to speak with a commercial litigation lawyer to understand your shareholder rights in the circumstances. There are many factors to consider, and sometimes it is a matter of expert knowledge about?the law that requires the guidance of a legal professional.?
Common Shareholder Issues That May Lead to Litigation
While navigating a shareholder dispute and before starting any legal action, it is vital that you both understand what the specific legal issues are. Some examples of common shareholder issues are:?
Understanding the issues may also require you to evaluate what kind of claim might be available to you as a shareholder. The most common claims are shareholder oppression and derivative actions.?
Shareholder Oppression and Derivative Actions
Shareholder oppression generally occurs when another shareholder, officer, director, corporation, affiliate or other relevant party oppresses, unfairly disregards the interest of, or unfairly prejudices an appropriate complainant’s interests.?
An appropriate complainant for shareholder oppression will depend on the jurisdiction, but almost always includes registered and beneficial owners of shares in a company. This is typically the appropriate route when a shareholder’s interests are specifically being affected.?
A derivative action allows a shareholder or other interested party to sue or defend on behalf of a company. This kind of action usually requires the permission of a Court, and advanced notice to the company’s board of directors to deal with an issue affecting the whole company - including the shareholder’s interests.??
Whether the shareholder issues at the heart of the dispute are oppressive or the subject of a derivative action, it is always best to collect and gather any evidence relevant to the shareholder issue. Examples of appropriate documentation include:
Determining what the issues are, and what evidence to gather is not a simple task either. In some cases it can be straightforward, but internal corporate disputes can become complicated and confusing very quickly. It is best to consult with a commercial litigation lawyer to understand what the issues are at the heart of the dispute, and what documents would best support an argument to resolve a shareholder dispute in your favour.??
The Availability of Alternative Dispute Resolution
Litigation should be a last resort when dealing with shareholder disputes. In some cases, shareholder agreements will list alternative forms of conflict resolution. However, even where there is no shareholder agreement, ADR processes can be used by the parties as a cost-effective alternative to litigation.?
In Ontario, parties to a shareholder agreement stating all shareholder disputes must or “shall” be submitted to binding arbitration are likely unable to bring a civil claim for resolution of those same issues through the Ontario Superior Court of Justice.?
The most common forms of alternative dispute resolution (“ADR”) are negotiation, mediation, and arbitration. Depending on the facts and situation of the case, one of these three may be more beneficial to participate in than starting litigation. Furthermore, it is common that a shareholder agreement contains a dispute resolution clause listing one of the aforementioned ARDs.?
Three Common Forms of Alternative Dispute Resolution
Negotiation involves meeting with the other party(s) and participating in good-faith discussions to reach a mutually agreeable resolution. For a successful negotiation, both parties must understand that they might not get exactly what they want, and should aim towards a reasonable compromise.?
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Mediation involves hiring an impartial third party, or mediator, to facilitate a discussion between the parties in the hope that they will come to a resolution. One of the benefits of mediation is that the parties will get to choose a mediator they think will best facilitate the mediation. Mediation can be beneficial when two or more parties struggle to communicate constructively, and there is uncertainty about the demands of each party.?
Arbitration is a type of hearing that involves having an impartial third party, or arbitrator, make a legally binding decision about the issues. While the parties have some freedom to agree on the process, there can be regulatory laws that apply to arbitrations. For example, Ontario has the Arbitration Act,1991.??
During the arbitration, the parties will have a chance to present their evidence and arguments during the arbitration hearing. Arbitration, though the most expensive form of ADR, is usually quicker and more cost-effective than proceeding through litigation. It is important to note that the arbitrator's decision may be final, with limited means to appeal the decision.
How A Commercial Litigation Lawyer Can Help
Shareholder disputes can be stressful, time-consuming, and expensive. They can also become complicated, and require extensive legal expertise. A commercial litigation lawyer can provide you peace of mind throughout a shareholder dispute by:?
Conclusion
Shareholders own a portion of a company, and their rights depend on the unique circumstances of their case. Where shareholder disputes arise, it is important to understand these 3 things before commencing litigation:?
There is no substitute for consulting with a commercial litigation lawyer to understand your legal rights, and maximize the chances of achieving your desired result before and during a lawsuit.?
Contact Us?
If you have any questions about your rights as a shareholder or need assistance at any stage of a shareholder dispute, our team of experienced commercial litigation lawyers at Achkar Law can help. Contact us by phone toll-free at 1-866-471-5139 or email us at [email protected], and we will be happy to assist.
If you are a small or medium-sized company looking for full-service support with a same-day response, visit our CLO Program page for our strategic solutions.
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