Shareholder disputes can arise for a variety of reasons, including disagreements over corporate governance, compensation, business strategies, or the distribution of profits.
When these disputes occur, they can destabilize the business, harm relationships between the parties involved, and sometimes even threaten the viability of the company itself.
Fortunately, there are several legal avenues available to resolve shareholder disputes. At Myers Longhofer LLC, in Overland Park, Kansas, our business law attorneys are dedicated to helping shareholders and business owners like you. Let's take a look at some of the legal options available to you.
Prevention of Shareholder Disputes
Before looking into the specific legal options available for resolving shareholder disputes with the help of an experienced business law attorney, it's important to recognize that many issues can be avoided or minimized through proper planning.
Many companies in Kansas take preventive measures to reduce the likelihood of disputes arising in the first place. Some of these measures include:
Well-drafted shareholder agreements: A clear and comprehensive shareholder agreement is essential for outlining the roles, rights, and responsibilities of shareholders. It should also specify dispute resolution mechanisms, such as mandatory mediation or arbitration.
Clear governance structures: Making sure that the company has a clear and well-communicated governance structure helps in preventing confusion or disagreements over decision-making processes.
Regular communication: Keeping open channels of communication between shareholders and management can mitigate misunderstandings that lead to disputes.
While preventing shareholder disputes through clear agreements and effective governance structures is ideal, it's equally important to have established mechanisms in place to address conflicts when they inevitably arise.
Internal Dispute Resolution Mechanisms
In Kansas, many companies include provisions in their shareholder agreements or corporate bylaws that outline internal dispute resolution mechanisms.
These mechanisms aim to resolve issues without the need to resort to litigation. The most common forms of internal dispute resolution include:
Mediation
Mediation is a voluntary, non-binding process in which a neutral third party (the mediator or business law attorney) facilitates communication between the disputing parties to help them reach a mutually acceptable solution.
Many shareholder agreements require shareholders to mediate any disputes before they proceed to court. Mediation is often preferred because it's generally faster, more cost-effective, and less adversarial than litigation.
In Kansas, mediation is widely used in shareholder disputes as it allows the parties to maintain control over the outcome while avoiding the costs and uncertainty of litigation.
Advantages: It's confidential, allows for creative solutions, and can preserve business relationships.
Disadvantages: There's no guarantee that mediation will result in an agreement, and it may not be suitable for all types of disputes.
A more formal alternative to mediation would be arbitration. Speak to a business law attorney for more information if you're unsure which option is right for you.
Arbitration
In arbitration, a neutral third party (the arbitrator) hears arguments and evidence from both sides and makes a binding decision. This process is often specified in shareholder agreements as a way to avoid lengthy court battles.
Arbitration is legally enforceable in Kansas, meaning that the decision reached by the arbitrator can be compelled in court.
Advantages: Arbitration is usually faster than litigation, and the arbitrator's decision is final and binding, providing a sense of closure.
Disadvantages: Arbitration can be costly, and the parties may not have the same opportunity to appeal the decision as they would in court.
If internal mechanisms like mediation or arbitration fail or are unavailable, shareholders in Kansas may resort to statutory and common law remedies.
Kansas Statutory and Common Law Remedies
These remedies provide legal options for resolving disputes through the judicial system.
Kansas Business Corporation Act (KBCA)
The Kansas Business Corporation Act (KBCA) governs the formation, operation, and dissolution of corporations in Kansas. It also provides mechanisms for resolving shareholder disputes.
Some of the key statutory provisions under the KBCA that may be relevant in shareholder disputes include:
Shareholder derivative actions: A shareholder may bring a derivative action on behalf of the corporation if the corporation’s officers or directors have violated their duties. This is typically used in cases of alleged mismanagement or fraud.
Oppression of minority shareholders: Kansas law recognizes the possibility of "shareholder oppression," which typically involves actions by majority shareholders that unfairly disadvantage minority shareholders. In some cases, minority shareholders may seek judicial intervention if they feel that their rights are being oppressed or violated.
Dissolution of the corporation: Under the KBCA, shareholders may petition for the dissolution of the corporation in cases of deadlock, or where the corporation is unable to function effectively due to ongoing disputes. Kansas law provides for both voluntary and involuntary dissolution, with specific provisions related to shareholder deadlock.
Shareholders often have a direct claim against officers and directors who breach their fiduciary duties under Kansas common law. Reach out to a business law attorney to learn more.
Breach of Fiduciary Duty
Fiduciary duties include the duty of care (acting in the best interest of the corporation) and the duty of loyalty (avoiding conflicts of interest). If directors or officers breach these duties, shareholders can bring lawsuits against them.
Example: If a director uses corporate assets for personal gain or fails to disclose a conflict of interest, a shareholder might have grounds for a lawsuit.
Remedy: Remedies for breach of fiduciary duty can include financial damages, removal of the offending directors, or other corrective actions.
In some cases, shareholders can bring a direct action for damages resulting from their individual injury.
Direct Actions by Shareholders
This is distinct from a derivative action, as it seeks relief for harm done directly to the shareholder, rather than the corporation. For example, a shareholder might bring a direct action if they were personally harmed by a fraudulent transaction or misrepresentation.
If alternative dispute resolution mechanisms are unsuccessful or unavailable, Kansas courts provide several legal avenues for resolving shareholder disputes. Consider speaking to an experienced business law attorney for more information.
Court-Based Remedies and Actions
Shareholders can file lawsuits in Kansas courts to address a range of disputes, including breaches of fiduciary duty, corporate governance issues, and shareholder oppression.
The courts may award monetary damages, order specific performance (e.g., enforcing the terms of a shareholder agreement), or provide other remedies as deemed appropriate.
Types of Shareholder Lawsuits
There are two specific types of shareholder lawsuits:
Breach of contract: If shareholders feel that other shareholders or the corporation have violated a shareholder agreement or corporate bylaws, they may file a breach of contract lawsuit.
Fraud or misrepresentation: Shareholders may file lawsuits for fraud or misrepresentation if they believe that they were misled or defrauded during the sale or purchase of shares.
If shareholders are unable to resolve disputes, they may seek involuntary dissolution of the corporation under Kansas law.
Involuntary Dissolution
This legal action asks the court to dissolve the corporation and distribute its assets. Common reasons for involuntary dissolution include shareholder deadlock or other situations where it becomes impossible for the corporation to function.
The grounds for involuntary dissolution may include:
Shareholder deadlock
Failure to conduct business in accordance with the corporation’s bylaws
Mismanagement or oppressive conduct by the majority shareholders
Appointment of a Receiver
In some situations, shareholders may request the court to appoint a receiver to manage the corporation’s affairs during a dispute. This is often done in cases where the corporation is unable to operate effectively due to conflicts between shareholders or directors.
Resolving shareholder disputes in Kansas requires an understanding of both preventive measures and the various legal remedies available.
While alternative dispute resolution methods like mediation and arbitration are often the most efficient and cost-effective solutions, statutory and common law remedies also provide important avenues for resolving disputes that can't be settled through negotiation.
Contact an Experienced Business Law Attorney Today
If you're experiencing a shareholder dispute and you need a business law attorney, don't hesitate to contact Myers Longhofer, LLC. We serve clients in Kansas City, Missouri, along with Overland Park, Johnson County, Olathe, Leawood, and Shawnee. Contact us today to schedule a consultation.
