Shareholder disputes can destroy an otherwise thriving corporation if they are not resolved efficiently. These disputes may turn on who is controlling the direction of the business, a breach of fiduciary duty, executive compensation, minority shareholder rights, or shareholder appraisal rights. Shareholder disputes can be resolved through a pre-litigation dispute procedure or through litigation. The latter can get very expensive and put a business at risk. However, sometimes lawsuits are necessary. The litigation lawyers at Klapper & Fass can develop a strategy for businesses in New York and elsewhere in the U.S., helping them protect their interests in the event of a shareholder dispute.How Shareholder Disputes Unfold
Many corporate disputes can be resolved with reference to the shareholder agreement. These documents usually address the rights and obligations of all shareholders. When drafting such an agreement, the majority shareholder will need to consider restrictions on the right to transfer shares, particularly in a closely held corporation. If these rights to transfer are not regulated, the shares can end up with an ex-husband or ex-wife with whom none of the shareholders contemplated being in business.
Commonly, a right of first refusal clause is drafted into shareholder agreements, so that the corporation or another specified shareholder has the right to purchase any shares if an unwelcome transfer is proposed. Similarly, the agreement should specify what would happen to the shares in the event of a termination of an employee shareholder for cause, and in the event of death, disability, retirement, or resignation.
However, when there is no shareholder agreement, or the agreement does not address the dispute at issue, the New York Business Corporation Law and New York common law will cover shareholders' rights in the dispute. Under these laws, minority shareholders have significant rights, and although the law favors a majority shareholder, a majority shareholder has several important obligations worth noting.
For example, the majority shareholder appoints the Board of Directors at his or her discretion. In a closely held corporation, the Board is made up of the majority shareholder and anyone designated by the majority shareholder. He or she must be aware that the directors owe fiduciary duties of loyalty and care not just to the majority shareholder, but also to all other shareholders.
Under Business Corporation Law Section 1104, shareholders that hold 20% or more of all outstanding corporate shares can petition the court to have the corporation dissolved if the directors have committed illegal, oppressive, or fraudulent actions towards them, or if the corporation's assets are being wasted, looted, or diverted for a non-corporate purpose. The court will determine whether dissolving the corporation is the only way to give the petitioners a fair return on their investment and whether dissolution is necessary to protect the rights of a substantial number of shareholders or petitioners. Any non-petitioning shareholder can purchase the shares of the petitioners at their fair value if a Section 1104-a action is filed.
Under both the Business Corporation Law and the common law, shareholders have the right to review corporate books and records, including financial statements, minutes, or shareholder lists. They must be reviewing the books for a reason related to that person's shareholder interests.Seek Legal Guidance for a Business Dispute in New York
At Klapper & Fass, we can provide sound advice to shareholders in the event of a dispute, whether there is a shareholder's agreement that governs the dispute, or the dispute is subject to corporate and common laws. We represent both majority and minority shareholders. Every business dispute in New York or elsewhere is unique. Our attorneys maintain offices in White Plains and Manhattan, serving all five boroughs in New York City. We also offer legal guidance in Westchester, Orange, Dutchess, Rockland, Suffolk, and Nassau Counties, and in states such as California and Michigan. Contact our office at 914.287.6466 or via our online form.