How Close Corporations Can Handle Shareholder Disputes

Close corporations may need to handle shareholder disputes that could have a significant effect on their businesses. When minority shareholders disagree with decisions affecting how a corporation is run, they could raise a legal challenge in court. If you are involved with a closely held corporation, you should develop an understanding of how to deal with shareholder disputes effectively. Finding a solid legal team for advice to back you up can be a great help.

Definition of a Close Corporation

A close corporation, or closely held corporation, has only a small number of shareholders. Usually the maximum number of shareholders is defined in the state business laws for the state in which the corporation is organized. Thirty-five shareholders is a typical maximum limit for a close corporation.

In addition, close corporations cannot be publicly traded on the stock market. Many close corporations are small enough that the shareholders can effectively run the day-to-day operations instead of a board of directors. If shareholders run the company, they assume the fiduciary duties that directors owe corporations.

How Do Shareholder Disputes Arise in a Close Corporation?

Typically, shareholder disputes in a close corporation arise when minority shareholders disagree with a majority shareholder’s decision. Like larger corporations, closely-held corporations have some minority shareholders (people who hold fewer shares of the corporation’s stock). Majority shareholders in close corporations may have the ability to push their agenda for the corporation simply because they hold the most shares of stock. When shareholders vote, the person with a majority of shares can vote all those shares for their preferred decision. As a result, minority shareholders may have little decision-making power on behalf of a close corporation.

Of course, minority shareholders may not agree with the agenda that a majority shareholder wants to advance. The minority could protest or even speak to a business lawyer about a court battle for control of the corporation. As mentioned above, shareholders in a close corporation likely have the same fiduciary duties as corporate directors would. Minority shareholders can accuse majority shareholders of betraying those fiduciary duties in their voting positions.

Fairness to Minority Shareholders

If you speak to a business lawyer about a shareholder dispute, you will likely learn that shareholder disputes in close corporations can be tricky. They require interpreting the typical fiduciary duty rules for the board of directors in the context of a voting majority shareholder. In general, directors must use their best business judgment when making decisions on a corporation’s behalf. This includes avoiding conflicts of interest and acting in good faith.

When a majority shareholder in a closely held corporation inherently has an interest in voting a certain way, it may seem like all votes will be unfair to minority shareholders. Courts have held that majority shareholders must act in an “intrinsically fair” way to the minority interests when the majority will benefit from their decision because they are the controlling shareholder. If a majority shareholder purposefully aims to oppress a minority shareholder, then a court may question whether the majority has properly fulfilled its fiduciary duties. See, e.g., Orchard v. Covelli, 590 F. Supp. 1548, 1556 (W.D. Pa. 1984).

Resolving Shareholder Disputes

Are you a shareholder in a closely held corporation? Then you may need some legal advice about avoiding and resolving shareholder disputes. It is especially important that you understand your duties as a shareholder, whether you are in the minority or majority. If you are a minority shareholder and feel that the majority shareholder is acting unfairly, you may have legal recourse for requiring intrinsic fairness in corporate decision-making. If you are a majority shareholder, you probably need tips on fulfilling your fiduciary duties while holding the controlling votes in the corporation. Contact our team at Henke, Williams & Boll to learn more about these important issues.

Helping Shareholders with Private Company Disputes

As experienced Houston business lawyers, we help shareholders in close corporations address and resolve disputes. Our advice is tailored to your unique situation because every closely held corporation is different. If you need assistance with a shareholder dispute, please give Henke, Williams & Boll a call. To set up a consultation, you can reach us at 713-940-4500 or use our convenient Contact Form.

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