Various different types of disputes can trigger business litigation. In some cases, companies have to enforce their contracts when vendors or former employees do something inappropriate. Other times, litigation may relate to unfair competition. Occasionally, individuals who invested in an organization decide to pursue litigation.
Shareholder lawsuits can cost a company thousands of dollars in legal fees and other expenses. They can damage the organization’s reputation with the local community and with other potential investors. Typically, shareholders who have invested in a company do not want to take actions that could reduce the business’s profitability.
However, in some scenarios, they may feel that litigation is their only option. A shareholder freeze-out is one of the many scenarios in which shareholders may feel compelled to take legal action to assert their rights. What types of company conduct could lead to allegations of a freeze-out or squeeze-out targeting minority shareholders?
Private or unannounced meetings
One of the many rights extended to shareholders is the right to attend regular meetings. The business makes disclosures regarding financial matters and future prospects for the company. Access to those meetings is crucial to the utilization of shareholder rights related to guiding the future of the company. When leadership holds meetings without providing advance notice, that could be indicative of an attempt to freeze out certain shareholders.
Preventing shareholders from voting
Overtly keeping shareholders out of meetings can create a paper trail that affirms the shareholders’ allegations of inappropriate conduct. In some cases, leadership within the organization or a coalition of shareholders who form a majority may allow every minority shareholder to attend meetings. However, they may take steps during the meeting to prevent a vote from occurring or to deter specific shareholders from voting. Shareholders may need to document each of these incidents as they occur to establish that misconduct is afoot.
Denial of dividends
Being a shareholder doesn’t just provide the right to vote and attend meetings. Shareholders also have a right to receive dividends or a share of the profits generated by the business. In some cases, leaders may make an effort to prevent minority shareholders from receiving the funds that they deserve. The goal of a freeze-out is usually to force shareholders to sell their holdings by denying them their rights, including any returns earned on their investments.
Business leaders trying to use forceful tactics to deal with minority shareholders may need to prepare for the possibility of legal conflict. Responding effectively to shareholder lawsuits can help business leaders limit the reputation damage and expense generated by a dispute within their organization.