Common Reasons Shareholders File Dispute Claims
When shareholders and board members invest money in a company, they expect to receive returns on their investment. Typically, these returns take the form of annual dividends and an increase in share value over time.
That said, shareholders have certain rights that protect their investments. If they believe management has treated them unfairly or not acted in the company's best interests, they can seek the services of a shareholder dispute lawyer to help them file a dispute claim as a last resort.
A shareholder dispute is a legal process where one person or group (the claimant) challenges another person or group (the respondent) for unfair or illegal actions under the company’s bylaws.
Disputes also help protect minority investors from potential exploitation from majority shareholders who might attempt to abuse their power for personal gain at the expense of other investors.
This article explores some common reasons why shareholders file dispute claims.
Bad Corporate Governance
Bad corporate governance happens when a company’s board of directors or managers fail to adhere to proper corporate governance standards. This can include everything from poor financial reporting to insider trading, which can significantly impact shareholders.
Bad governance can also happen when a CEO or board member makes decisions that are against the best interests of the shareholders. For example, a CEO may start making risky investments that jeopardise the company’s future. Or a CEO may divert funds from research and development to pay for frivolous expenses.
Unfortunately, bad corporate governance can result in significant losses for shareholders and decreased confidence in the company’s stocks.
Let’s say a company has a poor corporate governance structure in place. This can allow a few people (either the company’s managers or the board members) to control the company’s operations with little or no oversight from other shareholders. This scenario creates an unfair advantage for those select few individuals, leaving other shareholders out in the cold.
If this is happening at your company, you may be able to file a dispute claim with a shareholder dispute lawyer and get the attention of the company’s board members or managers.
Improper Use Of Investor Funds
This can happen when a company misappropriates investor funds that have been put into the company through a stock or debt offering. This can include a range of actions, such as paying out excessive executive salaries or making unwise investments.
If a company misuses investor funds, it can have serious implications for shareholders, as it can lower their overall return on investment.
If you believe a company has misused your funds in this way, you can file a dispute claim and request that your company explain its actions. You’d want to include your specific concerns in the claim and any evidence you may have to support your allegations.
Conflicting Interests Exist Among Board Members
Conflicting interests among board members occur when a board member has an interest in the company that would create a conflict of interest with other shareholders. This can include everything from a board member working for the company to owning a stake in a competing business.
It can be difficult to prove that such a conflict exists. But if you do, you may be able to persuade the company’s board members to make changes that are in the best interests of the company as a whole.
A Company Culture Where Employees Are Abused Or Discouraged From Speaking Out
If a company has a culture where employees are abused or discouraged from speaking out, it can have serious implications for shareholders. This could include a company punishing whistleblowers who try to report illegal or unethical practices within the company.
A company with a culture like this may not be conducive to making sound business decisions, which may damage its reputation and hurt its stocks' value.
The Company Doesn’t Seem to Have a Long-term Plan
The Securities and Exchange Commission (SEC) requires public companies to draft and follow a long-term business plan. This plan should contain details explaining the company’s strategic vision, including both short- and long-term objectives.
If a company fails to follow this plan, or if it doesn’t have a long-term plan, it will be less likely to achieve the growth and profitability that its shareholders desire. This can have serious implications for a company’s stocks, as its share price may decrease as a result.
Lack Of Transparency In Business Practices
Transparency refers to how transparent a company is in its business practices. If you believe a company is operating without transparency, this may be an appropriate reason for a shareholder dispute.
The bad news is that a shareholder dispute is unlikely to resolve transparency issues. Instead, it will probably only address the fact that the company is not meeting its obligations to shareholders.
Nonetheless, some signs that a company is operating without transparency include:
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- The company refuses to provide investors with quarterly earnings reports.
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- The company does not make its financial projections available to the general public.
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- The company has not made significant progress toward achieving its long-term goals.
Disappointing Financial Results
Even if a company operates in a strong industry, it can still disappoint its investors if it fails to meet its financial goals.
However, bad financial results don’t automatically constitute a reason for a shareholder dispute. But if financial results are poor because of mismanagement—and not because of an industry-wide trend or other extenuating circumstances—then such mismanagement may be reason enough to file a shareholder dispute with the help of a shareholder dispute lawyer.
A company may be mismanaging its affairs if it:
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- Failed to live up to its revenue projections.
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- Spent too much money on research and development (R&D) or other projects.
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- It is not spending money on projects that are likely to produce significant revenue in the short term.
The Bottom Line
Bringing attention to these issues can help you protect your investment and ensure that the company’s management and board members are held accountable. You can also use this information to decide whether or not you want to continue investing in the company.
It is important to note that shareholder disputes can be expensive and difficult. Most claims are resolved through negotiations between shareholders, management, and the company’s board of directors.
If a dispute ends up in court, it also can take a long time to resolve—and cost a lot of money. There’s also no guarantee that filing a shareholder dispute will be successful. Most shareholder disputes are unsuccessful. So, before taking this drastic step, you should consider less drastic alternatives.
Given the potential costs and risks associated with shareholder disputes, you may want to consult with a shareholder dispute lawyer before filing one.
