Shareholders help to provide investment for a growing or temporarily struggling business. In return for acquiring an interest in the company by making an investment, they have a right to vote at meetings, learn information about the company’s performance and even receive dividends when the company is profitable.
Shareholders frustrated by company operations or denied their rights may sometimes pursue litigation against the companies in which they have previously invested. Litigation can be the result of a freeze-out or squeeze-out attempt that interferes with their rights. It could also potentially serve to address the issues with an executive or to prevent transactions that could prove unfavorable to the business. The agreement signed with shareholders can theoretically serve to limit the risk of lawsuits brought by shareholders against the organization.
How can a shareholder agreement prevent unnecessary litigation?
By clarifying expectations
Shareholders may sometimes have unrealistic expectations based on their agreements with other businesses. Therefore, it is of the utmost importance that shareholder agreements clearly detail standards regarding dividends, voting rights and long-term development plans for the organization. The more thorough a shareholder agreement is, the less likely it is that disagreements about the business might lead to litigation.
By requiring other solutions
Adding alternative dispute resolution clauses to contracts can be an effective way to deter shareholders from using lawsuits as their first response to dissatisfaction. When a contract requires mediation or arbitration, shareholders may have to sit down and discuss their disputes with majority shareholders or company leadership in a confidential setting instead of taking the matter to court.
By preventing voting gridlocks
In some cases, shareholder lawsuits relate to issues that arise at meetings where a vote is necessary. It is possible to prevent such situations by adding special provisions to shareholder agreements. Granting certain shareholders veto rights or clarifying how to address disputes that shareholders cannot resolve at a meeting can limit the likelihood of frustrated shareholders choosing to file a lawsuit.
Drafting custom shareholder agreements can limit some of the risks that come from accepting private investments for a publicly-traded business. Given how costly litigation can be and how it can damage the reputation of a business, seeking to limit lawsuits brought by shareholders is often a smart choice.