Avoiding Shareholder Litigation

Here are a few strategies that we have employed to deal with shareholder disputes:

Assert Inspection Rights. This can result in some surprising revelations which, in turn, may lead to interesting results.

Expand Board of Directors. Expanding a company’s Board of Directors can avoid and/or eliminate a deadlock. It may also bring in a fresh point of view.

Purchase Control. If the shareholders each own an equal number of shares one shareholder may wish to consider paying a premium to buy a controlling interest in the company.

Seek Appointment of Provisional Director. If the corporation has an even number of directors and the board is deadlocked, any director or holder of at least 1/3 of the voting shares can petition a court to appoint a provisional director to break the deadlock. If the corporation has an uneven number of directors and the shareholders are deadlocked, any shareholder of at least ½ of the voting shares can petition a court to appoint a provisional director under certain circumstances.

File for Bankruptcy Reorganization. Under certain circumstances, a Chapter 11 bankruptcy reorganization can result in one shareholder, or a group of shareholders, gaining control of the corporation.

Initiate Involuntary Dissolution of the Corporation. Under certain circumstances (such as fraud, mismanagement or abuse), a court may order the dissolution of a corporation against its will initiated by at least 1/2 of the directors or 1/3 of the shareholders. (Depending on the facts, a shareholder with less than 1/3 can initiate this action.) The corporation or 50% of the shareholders may elect to avoid this result by agreeing to buy out the initiator’s stock for fair market value.

Sell Company to Third Party. If the shareholders are unable to continue in business together, the shareholders may wish to consider selling the company to a third party.

Execute a Buy-Sell Agreement. Of course, one of the best ways to avoid a shareholder dispute is to have all shareholders enter into a written agreement that sets forth what rights the shareholders will have in the event of certain contingencies (such as death, disability or deadlock). This is ideally done when the company is first formed but can be done at any time, including when a dispute arises.

These are just a few of the possible approaches that may be considered when faced with shareholder disputes in California. If you are dealing with a problem of this sort, we would be pleased to provide a first consultation at no charge.