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Steps a Company Can Take to Inoculate Itself Against Shareholder Dispute Litigation

As discussed many times on this blog, shareholder dispute litigation can be extremely costly and terribly disruptive to company operations.  From the company’s point of view, it should be avoided if at all possible.  Once an oppressed minority shareholder complaint is filed, or is about to be filed, it is often too late to avoid.  This post is more focused on what company management can do to make sure the circumstances that could lead to such a lawsuit do not infect your company.

While the suggestions may be somewhat outside the box, corporate management can – and perhaps should – take proactive measures to see if your company is particularly vulnerable to such a lawsuit.   For example, a company may actually survey its shareholders – formally or informally, depending upon the circumstances – to determine their level of satisfaction with management.  Many “corporate divorce” suits have their seeds in what is at least perceived as the absence of information sharing.  Do the minority shareholders in your company feel this way?  If you share no more information than is legally required, you may be following the law, but are you arousing unnecessary suspicion?  Many shareholder disputes have arisen between factions with polar opposite views about whether the financial information shared has been adequate.  If all it would take to quell a potential uprising is providing quarterly updates rather than annual, that would seem a small price to pay for corporate peace.

Company accountants can also be a useful barometer of whether you have a potential fire in your back yard.  Your corporate accountant works for the company and answers to you, so she may not want to criticize anything you are doing.  However, if you let your accountant know you are concerned about how the minority shareholders are being treated, and that this is a priority to you, you may be surprised about what you hear.  One client took my advice and asked the company accountant if he perceived any potential issues with minority shareholders, and the accountant suggested that salaries be decreased, with more money being slated for shareholder distributions.  When this suggestion was taken, we learned that the minority shareholders had already “lawyered up,” and were preparing to file suit.  That accountant saved scores of thousands in legal fees with that simple recommendation.

I mention on this site often how critical it is to have an attorney who is experienced dealing with shareholder dispute litigation, should you ever find yourself involved in such a suit.  However, it can also be important to have an accountant with at least a modicum of experience dealing with different shareholder factions.

More on this to come in my next post. If you have any questions about this post, or other related matters, please email me at dcroberts@nmmlaw.com.