Shareholders typically invest in businesses as a way of turning their capital into ongoing revenue and/or because they truly believe in the business’s purpose. Successful business investments allow shareholders to receive dividend payments and influence how the company operates. They receive a portion of the company’s profits based on the shares that they hold in the company and get to vote on key matters at shareholder meetings.
For many, helping ensure that the company remains as profitable as possible is a priority. They do not want to take any steps that could cut into organizational profit margins. Contentious litigation with shareholders can disrupt company operations and cost a business tens of thousands of dollars or more to resolve.
Why do shareholders who have an interest in keeping a company profitable sometimes choose to take legal action that can impact organizational profitability?
Concerns about company management
Sometimes, shareholders must make the difficult decision to sacrifice short-term profits and stability for the long-term sustainability of the organization. Perhaps they believe that new leadership is necessary because the company has floundered for multiple successive quarters.
Maybe there are signs that those in key positions have failed to uphold their fiduciary duty or intend to take actions that could ultimately undermine the company’s success. Shareholders sometimes initiate litigation to prevent unfavorable transactions or hold a company accountable for failing to prioritize the company’s financial success.
Misconduct that infringes on their rights
Some shareholder disputes begin with allegations of a shareholder freeze-out. Minority shareholders might assert that business leadership, a majority shareholder or a coalition of shareholders has denied them their legal rights.
Perhaps they could not access recent meetings or did not get to vote at those meetings. Maybe the company reported profits but did not issue dividend checks as the shareholder agreement requires. In scenarios where there are attempts to force shareholders to sell their interests or to deprive them of their rights, shareholders may feel that they have few options other than taking legal action against the company.
Leaders at organizations who familiarize themselves with individual shareholders and current company practices could prevent shareholder disputes from escalating into litigation. Proactively protecting the rights of shareholders and responding assertively to complaints can help resolve disputes that could otherwise lead to costly litigation.