A disagreement with a co-owner can put your business, your investment and your relationships at risk. In California, shareholder disputes generally end through an agreement or a court decision, and the law gives you tools to move toward either. Understanding your options may help you decide where to start.
What should you review first when a shareholder dispute begins?
It may help to begin with your shareholder agreement and bylaws, which may spell out how disputes are handled. You may also have a right to inspect the corporation’s accounting books, records, and minutes by written demand, as long as your purpose is reasonably related to your interest as a shareholder. The articles and bylaws cannot limit that right.
Can you settle a shareholder dispute without going to court?
Many disputes can be settled without a court ruling. Negotiation or mediation may lead to an agreement, including a buyout or an agreed exit from the company. Your shareholder agreement may also require mediation or arbitration before anyone files a lawsuit.
What kinds of lawsuits can a shareholder bring?
You may bring a direct claim for harm to your own interests, or a derivative action, which is a lawsuit on the corporation’s behalf. A derivative action has extra requirements:
- You must have held shares at the time of the alleged wrongdoing.
- You must describe your efforts to get the board to act, or explain why those efforts would be futile.
- The court may require you to post a bond of up to $50,000 if a defendant moves for one.
Because these requirements can affect whether a derivative action moves forward, it may help to understand them before you file.
What happens if you ask a court to dissolve the corporation?
Only certain shareholders may ask a court to dissolve a corporation, such as those holding at least one-third of the shares or total equity, or any shareholder of a statutory close corporation, which has articles limiting it to 35 or fewer shareholders.
Unless the articles of incorporation provide otherwise, the corporation, or holders of 50% or more of the voting power, may avoid dissolution by buying the petitioning shareholders’ shares for cash at fair value.
Every dispute depends on its own agreements and facts. If you are facing a shareholder dispute, it may help to speak with a business litigation attorney about your options under California law.