shareholder

Common Pitfalls of Shareholder Disputes and How to Avoid Them

Shareholders are important for the success of a business. Not only do they often bring valid advice to the table, they also bring money that funds the growth of your business. Still, as a startup, having shareholders might feel like you are out of control, especially if there are disputes on a regular basis. 

 

What if we told you that you are not alone and that a myriad of other businesses experience exactly the same thoughts and feelings. Shareholder disputes are common, especially if there aren’t any regulations in place as this creates the perfect breeding ground for disputes. 

 

Whatever the cause or reason, shareholder disputes can be a severe hindrance to the growth of any business. It might only lead to a few angry exchanges, but in the worst case scenario, it can cause shareholders to leave as well. This does not mean anything good for the future of your business as it can leave you without funding or critical advice. 

 

Therefore, it is always important for a startup owner to prepare for the worst. However, we are here to guide you through the process to point out five common pitfalls that cause shareholder disputes and how you can prevent these disputes from happening. 

 

Not having a shareholders agreement in place

One major pitfall that causes shareholder disagreements is the lack of a shareholders agreement. Without a shareholders agreement, there are no set rules in place and this allows disputes to arise. Similar to a contract, it helps to keep those bound to the contract in shape. 

 

Investopedia defines a shareholders agreement as: “an arrangement among shareholders that describes how a company should be operated and outlines shareholders’ rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders”.

 

When a shareholders agreement has been put in place, it helps to alleviate any unspoken misconceptions, disagreements and uncertainties. When disputes arise, one can simply pull out the agreement and resolve disputes by pointing to the agreement. 

 

Good to know, but how do I set up an agreement? There are multiple ways in which you can approach this. Just like a contract, a shareholders agreement can be set up at any time. However, this agreement should already be in place before the first shareholder invests in the company. 

 

A shareholders agreement includes: personal information of the shareholder (like names and surnames), the number of shares they hold, the total amount they have invested, dates that the shares were acquired, and the role of the shareholder. When obligations are set out, it helps to keep the shareholders on track as to what they should bring to your company. 

 

It is important that all shareholders be aware of this agreement and that they sign such an agreement when they are enrolled. It is also important that this agreement be reinforced when there are any changes regarding the company shares. 

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Disgruntled minority shareholders

Minority shareholders are also people who invest in your company. However, due to them having the minority of shares, they are not always considered as important when it comes to opinions and decision making

 

They might feel disgruntled and left out when they are not included in decision making of the company. This is especially the case when they are not even informed about any meetings that will be held or that new implementations were made without their input. 

 

After all, the reason why you have shareholders is to ensure investment into your company and to receive advice and guidance from a panel of people who want to see your business succeed. This also means that the more opinions you have, the better success rate you will face. 

 

Instead, allow minority investors to also attend these meetings, to have a say in choices regarding the future of your company and allow them to also participate in voting sessions. This will ensure that your minority shareholders also feel important and in the end will be best for the growth of your company.

 

Differences in financial compensation or contribution 

Compensation and contribution are sensitive topics and most try to avoid addressing it. However, when this topic isn’t addressed it can cause serious disputes between your shareholders. Common disputes regarding this topic involve the unfairness of  paying someone less because they work for your company that has exactly the same number of shares as another person, who doesn’t work for your company. 

 

A desire for fairness is part of being human. Therefore, it is important that all shareholders be treated fairly. By  fairness, though, we do not mean that every shareholder (regardless of their contribution) should receive exactly the same dividends, we mean that those who own the same amount should receive the same amount. 

 

Though, when a shareholder contributes more to the company, not necessarily in money but in time, it is only fair that they get paid a little extra for the time that they put in. Yes, we know, that contradicts the paragraph above, which shows exactly how fine the line is. 

 

We suggest that you decide and communicate clearly how shareholders will receive their dividends. If you decide that shareholders only receive dividends based on the shares that they hold, put that in your shareholder agreement. If, however, you decide that shareholders should be compensated for hours that they spent on your business, you should put that in your shareholders agreement. If they have signed that contract, they will be legally bound to it and it will also make your shareholders aware of how they can be expected to be compensated. 

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Unclear voting systems

Ah yes, voting. The democratic way that allows everyone’s opinions to count (except if it doesn’t, always). Voting can cause a whole  array of disputes, just as voting for parliament does amongst civilians. Accusations like unfair counting, disregarded opinions and fraud can also spring up when shareholders vote

 

It creates a bit of uncertainty for the business owner and makes some wonder if they should allow voting when making decisions. And some believe that voting is the best way to go. 

 

This can create disputes about the direction that your company should be taking. Even though voting is in place to create fairness and ensure that the majority of shareholders are happy, one disgruntled shareholder can be a spanner in the works. They can cause internal problems that might cause some shareholders to extract from the business. This can lead to financial losses. 

 

Once again, leave it up to your shareholders agreement. If you decide that all decisions will be made based on a voting system, put it in your shareholders agreement and ensure that each new party is aware of it. This will ensure that no disputes will break out when voting takes place as it will be common practise for your organisation. 

 

Uneven obligation distribution 

Fairness seems to be the running theme with this blog. And it is no different when it comes to the distribution of duties amongst shareholders. A myriad of disputes can spring from when shareholders feel that they are overallocated or that others aren’t contributing anything to the company. 

 

There might  be times that your shareholders feel like they have been putting in too much time and that they are not viewed as important enough. The strain of running the business should not just lie with a few shareholders. 

 

This is where minority and majority shareholders come to play. Within the shareholder team, it is important to express some structure to ensure that obligations are distributed evenly. For instance, the majority shareholder has the obligation of setting up the budget for the year. This way everyone has a fair obligation based on their contribution. 

 

This also can cause disputes,of course.. However, write your decision in your shareholders agreement. Again, this will ensure that everyone is aware of how your business is run, and how obligations are distributed. You might even go as far as to suggest that individual agreements are signed to outline obligations of each shareholder. 

 

At Velvet Community, we understand the pain, frustration and sleepless nights that are associated with running a business—especially a startup. Therefore, we invite you to join our community so that we can offer you the ability to grow your business. Through investment and through advice. We are a community dedicated to startup businesses and see the importance that they hold within our economy. We would like to help you be better. 


Visit our website to join the community and follow us on our Facebook, Instagram, Twitter and LinkedIn pages. This is where valuable content will be shared to ensure that your startup rises to the top.

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