Shareholder Disputes in Florida

Shareholder Disputes in Florida

Shareholders have a financial interest in protecting the value of their investment in a company.  As such, conflicts can arise when shareholders disagree about what is good for the business or their personal interests.  These disputes can be detrimental to a company, resulting in disruptions in operations, legal expenses and other damages.  While shareholder disputes may be impossible to avoid in some instances, they can be minimized with good legal advice.  In South Florida, our team of business disputes attorneys are ready to help.

How can shareholder dispute be resolved?

South Florida business attorneys can help navigate shareholder disputes before they require a business divorce or a corporate dissolution.  The first step in resolving a shareholder dispute is to understand the terms in the shareholder agreement and other relevant controlling documents.  Often, there are provisions to aid in conflict resolution, such as the following:

  • Removal of a director. Where permitted by the parties’ legal agreements, a conflict with a director may be resolved by voting out the director.
  • Appointment of a new director or advisor. The board may be permitted to bring a new disinterested voice into discussions to assist the parties in coming to an agreement.
  • Alternative dispute resolution. Both mediation and arbitration rely on neutral third parties to help resolve disputes without resort to litigation.
  • Shareholder resolution. A shareholder can propose a resolution to try to settle the conflict through discussions or a vote of the shareholders.

 

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What are common causes of shareholder disputes?

Disputes can arise for a wide variety of reasons.  Often, they result from a shareholder’s objection to the operation or management of the business.  There may also be conflicts arising from the actions of a sole or group of shareholders, which can adversely affect other shareholders.  In a startup business in Florida, there are unique challenges that might affect growing companies.  Issues may also arise if the business is not properly incorporated.

Breach of the Shareholder Agreement or Bylaws

The shareholder agreement outlines and defines the distribution and nature of the shares in a company, including identifying the different types of shares and the rights provided to the holder of each type.  Disputes may arise when a shareholder breaches one of the terms of the agreement, such as selling shares in violation of the relevant terms.

The company’s bylaws specify how the corporation’s internal affairs are governed.  For example, it sets forth how directors will be appointed, when shareholders will meet, and how finances will be managed and reported.  The failure of a shareholder or the company to follow the rules and regulations in the bylaws is a frequent source of conflict.

Breach of Fiduciary Duty

In Florida, fiduciary duties obligate the people who make important decisions for an entity to act in the best interests of the entity and its owners.  Fiduciary duties can be triggered by law or by virtue of the relationship itself.  Fiduciary duties are created when one party must trust and rely on another to exercise their judgment.

There are several kinds of fiduciary duties, including:

  • the duty of care that requires a fiduciary to use his or her informed business judgment in their role of overseeing the Company and making business decisions;

  • the duty of candor that requires a fiduciary to disclose material information that may negatively affect the business. This typically involves interactions between board members, shareholders and management of a company; and

  • the duty of loyalty that requires a fiduciary to act in the best interests of a party owed such duty. This prohibits a fiduciary from putting their personal financial interests ahead of a party that is owed such duty.

While many believe that duties that a fiduciary owes are absolute, in certain circumstances, like in a Delaware LLC, these duties may be waived.  The ability to waive these duties depends on the company’s legal entity type and where it was incorporated.

Compensation or Contribution Discrepancies

Where shareholders are also employees, conflicts may arise if there are differences in how they are compensated and there is no reasonable justification for the discrepancies.  Careful review of employment agreements for Florida employees can help significantly minimize the risks of future conflicts by utilizing these documents and other methods to clarify the employment relationship.

Discrepancies in Treatment of Majority vs. Minority Shareholders

Minority shareholders are at a disadvantage because they lack the votes to ensure their voices are heard.  As a result, most states give minority shareholders some protection against oppressive treatment by majority shareholders.  The Florida Business Corporation Act provides certain rights that benefit minority shareholders, such as a right to inspect records and obtain information, an appraisal right and the right to bring a derivative action.

Misappropriation of Company Assets

Misappropriation can come in many different forms, including skimming cash before funds are officially recorded on the company’s books, using company credit cards for personal use, abusing expense reimbursement and overstating hours worked.  If a shareholder misappropriates company assets, he or she may still be subject to liability even if no fiduciary duty is owed.

Disagreement Over Company’s Direction

Shareholders may disagree with decisions made by those running the corporation, and this occurs in both large and small businesses.  A wide variety of actions may precipitate this type of shareholder conflict, including the board’s or management’s decision to continue or discontinue product lines, move into new markets, relocate facilities or make capital investments.

 

What are the most effective ways to prevent shareholder disputes?

The best way to prevent shareholder disputes is to address potential problem areas in advance in the shareholder agreement and other relevant legal documents (e.g., employment agreements, articles of association, bylaws, etc.).  A well-drafted agreement can save the company significant time and money by avoiding disputes or minimizing the cost of resolving those that do arise.

 

Conclusion

Conflicts cannot always be avoided, but by taking proactive steps, companies can minimize the damages to the business.  Experienced legal counsel can guide California companies as to the most effective way to prevent or solve disputes while still protecting shareholder rights.

Romano Law can provide guidance on shareholder disputes in New York, California and Florida.

 

Photo by Adam Thomas on Unsplash

 

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