Shareholder Value Disputes: How to Be Prepared

Why Shareholder Disputes May Arise

In companies where a large number of shareholders exist, it’s important to ensure that shareholder agreements are bulletproof. The volatility of the stock market means that the company’s market value will consistently fluctuate. That can cause issues when settlements have to be made for minority shareholders, in particular.

Why is this relevant? Minority shareholders usually have as much of a vote as their shares. If a major corporate decision is being made that they don’t agree with, they’re legally allowed to request cash payment for the value of their shares. This is standard procedure during a merger or takeover.

However, because of some tactics used by majority shareholders in the past, minority shareholders have the right to dissent the decisions being made. These tactics included cutting minority shareholders out of a business by encashing their shares, recapitalization, and even selling material assets to strong-arm minority shareholders into decisions without consent.

Shareholder disputes will likely arise as a result of all of these tactics and situations.

How to Ensure Value Disputes Don’t Occur

Shareholder value disputes are often pursued by the complainants because they’re being underpaid for the share they hold in the case of redeeming shares for cash. The company value can be manipulated, or old figures can be used to understate the share value, which minority shareholders can then file a lawsuit against.

However, if you want to ensure this doesn’t happen with your company as a majority or minority shareholder, there are a few legal precautions to take. First, shareholder agreements need to be clear on what happens in case of a dispute. The contract should contain a process for determining the price of each share.

To ensure that everything is as above-board as possible, we recommend using a firm valuation platform to set the value of the shares bi-annually and/or before a major business transaction is made. This way, the resentment about being shortchanged on business shares is likely to be minimal.

Our company valuation software is the perfect software for your board of shareholders to use for biannual valuations. Equitest offers 9 different methods for valuations and a detailed report on the company’s worth — which makes it an ideal online valuation tool for accountability.

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