Shareholder Disputes: Understanding the Litigation Process and Its Alternatives

Shareholder disputes can involve a wide range of issues and competing interests. They can also proceed in a variety of different ways. As a result, when these disputes arise, informed decision-making is critical, and all shareholders involved need to ensure that they are taking appropriate steps with their long-term best interests in mind. Engaging an experienced Miami shareholder dispute attorney is a critical early step in this process.

Broadly speaking, there are two types of shareholder disputes: (i) disputes in which shareholders need to enforce directors’ and executives’ fiduciary duties; and (ii) disputes between minority and majority shareholders. The litigation process in each of these types of cases is unique, and depending on the circumstances involved, shareholders may have various options for favorably resolving their disputes without litigation as well.

Shareholder Derivative Litigation

We’ll talk about disputes in which shareholders need to enforce directors’ and executives’ fiduciary duties first. These are referred to as “shareholder derivative” proceedings because shareholders are technically taking legal action on the company’s behalf.

Directors and executives owe various fiduciary responsibilities to their companies. In short, directors and executives owe a duty to act in the company’s best interests, and when they fail to do so, they can be held accountable for any resultant losses. Some examples of potential grounds for pursuing litigation against directors and executives include:

• Misuse or misappropriation of company assets
• Usurping business opportunities for personal gain
• Self-dealing and other conflicts of interest
• Wasting company assets
• Failing to take action against waste, fraud, or other wrongdoing

When shareholders have grounds to pursue a derivative action, there are specific steps they need to follow. One of the first steps is to submit a formal “demand” to the company’s board of directors (unless submitting a formal demand would be futile under the circumstances). This demand provides the board with an opportunity—and the obligation—to assess the validity of the shareholders’ allegations.

If the board declines or refuses to take action, shareholders can then pursue their derivative action in court. At this stage, the company’s executives or directors will need to engage legal counsel, who will either focus on targeting a settlement or defending their clients against the shareholders’ derivative action by all means available. In the latter scenario, the executives’ or directors’ lawyers may assert a variety of defenses, including procedural defenses challenging the shareholders’ standing, their ability to effectively represent the company’s interests, and their choice of jurisdiction and venue.

From here, a shareholder derivative action will proceed similarly to any other type of corporate litigation. The parties will engage in discovery and pre-trial motions practice, and they will prepare their respective claims and defenses for trial. Settlement will remain an option throughout this process, and the parties may choose to pursue mediation or arbitration as a more efficient and cost-effective alternative to litigating the action in court.

A key aspect of shareholder derivative litigation is that if the shareholders’ claims are successful, any remedies will be awarded to the company—not to the shareholders themselves. Of course, this can ultimately benefit the shareholders as well, as it can help to preserve the value of their ownership interests in the company.

Minority-Majority Shareholder Litigation

In contrast to shareholder derivative litigation, minority-majority shareholder litigation involves a dispute between shareholders with different ownership and control rights. In these cases, minority shareholders sue their majority counterparts directly rather than taking legal action on behalf of the company. As a result, if their lawsuit is successful, they benefit directly (i.e., by recovering damages or other remedies for majority shareholders’ fraud or misconduct).

Similar to shareholder derivative actions, minority-majority shareholder disputes can involve a wide range of issues. Minority-majority shareholder disputes can also proceed through informal settlement negotiations, mediation, arbitration, or litigation. In many cases, pursuing mediation or arbitration will be required under the alternative dispute resolution (ADR) clause of the parties’ shareholder agreement—although certain types of claims may be exempt, particularly when injunctive relief is necessary to prevent additional harm.

Minority-majority shareholder litigation can be extremely complex, and it can also be highly adversarial in many cases. Even so, it will often be in all shareholders’ best interests to find a mutually agreeable path forward. When this is the case, working closely with an experienced Miami shareholder dispute attorney to take a tactful approach can be essential for achieving a favorable resolution that is acceptable to all shareholders involved. In some cases, this may involve reaching an agreement that allows the shareholders to continue working together. In others, it may involve liquidating certain shareholders’ ownership interests so that the parties can go their separate ways.

Alternatives to Shareholder Litigation

In all types of shareholder disputes, avoiding the costs (and inherent uncertainty) of litigation will frequently be in the best interests of all parties involved. Depending on the circumstances involved, various alternatives to litigation may be available. Along with mediation and arbitration, these alternatives may include:

• Calling a meeting to attempt to work out an amicable resolution;
• Negotiating amendments to the company’s shareholder agreement that allows the parties to move forward (and that will ideally help prevent similar disputes in the future);
• Appointing a director or advisor to facilitate an amicable resolution;
• Executing a mutually agreeable buyout of certain shareholders’ ownership interests in the company and/or,
• Using the existing terms of the company’s shareholder agreement to force a buyout or to trigger other mechanisms for protecting the company’s interests without litigation.

Even these are just examples. When any type of shareholder dispute arises, understanding all of the options that are on the table is a key first step toward making informed and strategic decisions.

Speak with a Miami Shareholder Dispute Attorney at Edelboim Lieberman in Confidence

If you need to know more about the options that you have available for resolving a shareholder dispute in Florida, we invite you to get in touch. To speak with an experienced Miami shareholder dispute attorney at Edelboim Lieberman in confidence, please call 305-768-9909 or request a free consultation online today.