Business disputes can arise in any business, large or small. But owner disputes are perhaps most common in small, closely held entities. Often business owners agreed to go into business together but, due to different management approaches or visions for where they see the company going, disagreements arise.
Disputes between small business owners are often contentious and give rise to claims for breach of contract, and more complicated issues that relate to corporate governance and fiduciary duties.
Disputes between business owners often arise because one owner or group of owners believes that others are not adequately representing the interests of the business or are not making decisions that are in the best interest of the corporation.
An owner may allege that another has wrongfully used assets, is engaged in self-dealing, or failed to seek approval of other owners when making decisions on behalf of the company. Other times owners may allege that they were kept in the dark by the other owners, or were “frozen out” by the process of owning and managing the company. Minority shareholders may claim that their views are not being taken into consideration and that they are being oppressed and excluded by the majority shareholders, or that some of the owners have engaged in inappropriate, if not outright criminal, activity such as stealing from the company or falsifying corporate records.
Here, we address some of the different types of legal claims business owners may make against one another.
A breach of the shareholder agreement can be as serious as selling shares in violation of the agreement, especially if shares are sold to a competitor. Other times shareholders might wish to terminate the shareholder agreement against the wishes of the other shareholders.
Most of these claims can be avoided through sound business planning. But if a business owner dispute becomes too contentious the assistance of a qualified business lawyer can be essential.
Claims for breach of contract arise when one party claims another party failed to live up to its end of the bargain. Disputes may arise because the contract was unclear or incomplete and one party is interpreting the agreement in a way most favorable to its goals and objectives.
In small, closely held businesses, and especially family-owned business, disagreements over direction are common. Decisions such as ceasing operations, letting go a non-shareholder employee, moving the business, and large outlays of capital can also trigger disagreements among business owners.
Minority shareholders are at a disadvantage, especially in smaller closely-held businesses, because they have fewer shares and have little power to change in the way the organization operates. North Dakota recognizes the rights of minority shareholders, who are susceptible to being frozen out of management decisions. Additionally, minority shareholder stock is often not marketable, so the value of a minority shareholder’s stock may be tied up in a business that does not operate with the minority shareholder’s best interests in mind. Oppressed minority shareholders may have claims that they are not being issued dividends, that corporate funds are being improperly used to pay personal expenses, or failing to allow minority shareholders access to corporate documents.
Shareholders should be compensated in a way that is fair and commensurate with their experience, training, expertise, and industry. When this does not happen, conflict can arise.
The most cost-effective and least disruptive way to resolve disputes between business owners is to avoid litigation. In some cases, especially in larger companies, this can be done through an internal investigation conducted by the company itself, or through an independent third-party.
Other times, the relationship between the business owners has become so fraught that negotiation is impossible and court intervention is necessary. In these cases, business owners may proceed to litigation in an effort to discover the extent of the mismanagement through discovery and trial.
Because litigation and trial can be so costly and contentious, many owners have a shared interest in maintaining the value of the company that is the subject of the dispute. For that reason, mediation and arbitration are often a good place to start, as both parties can work to find a mutually agreeable solution while still having the opportunity to explain how they feel they have wronged.
If alternative dispute resolution is unsuccessful, sometimes litigation is the only way to resolve a business owner dispute.
If your business is facing the disruption and uncertainty caused by a dispute among business owners, contact Fremstad Law today. Our business lawyers have extensive experience in finding creative ways to avoid costly and time-consuming litigation so that you can focus on moving forward from your business owner dispute.
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