Common Reasons for Business Partnership Dispute Litigation

It is common for business owners to have disputes concerning ownership percentage, control of the business, or business management. Solving the ownership dispute is key to preserving the company.

By Douglas Wade, Attorney

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Table of Contents

1. What are business disputes?

2. What are the different kinds of business disputes?

3. How to resolve business owner disputes

What are business disputes?

Disputes between business partners can occur in enterprises of all sizes, but they tend to be most common in smaller, closely-knit ventures. Frequently, individuals who initially joined forces to start a business find themselves at odds due to varying management styles or differing outlooks on the company’s direction.

These conflicts between owners of small businesses are typically intense and may lead to partnership dispute litigation, as well as more intricate matters involving corporate management and fiduciary responsibilities.

What are the different kinds of business disputes?

Business partnership dispute litigation between business proprietors commonly arise from a perception that certain owners are not adequately safeguarding the business’s interests or are making decisions that do not align with the corporation’s best interests.

An owner may contend that another has improperly utilized assets, engaged in self-serving actions, or neglected to obtain consent from fellow owners when making decisions for the company. In other instances, owners might assert that they were kept uninformed by their counterparts or were excluded from the ownership and management process. Minority shareholders may argue that their opinions are being disregarded, and they feel oppressed and marginalized by the majority shareholders. They may also claim that some owners have engaged in inappropriate, and possibly even illicit, activities such as embezzling from the company or falsifying corporate records.

This writing is informed by representing hundreds of business partners disputes litigation as an attorney; additionally, the best data comes from my first-hand conversations with business partners and their leadership team. In this article, we examine various types of legal allegations that business owners may level against each other.

Breach of fiduciary duty

Violating the shareholder agreement, such as selling shares in defiance of the terms, can be highly consequential, especially if shares are sold to a competitor. In some instances, shareholders may seek to dissolve the shareholder agreement, even if it contradicts the desires of other stakeholders.

The majority of these disputes can be preempted with thorough business planning. However, in cases where a business owner dispute escalates to a high level of contention, the expertise of a skilled business attorney can be indispensable.

Breach of contract

Allegations of contract breach emerge when one party asserts that the other party did not fulfill their obligations as agreed upon. Conflicts may surface due to ambiguity or gaps in the contract, leading one party to interpret the agreement in a manner that aligns most favorably with their own aims and objectives.

Disagreements over direction

In small, closely-knit enterprises, particularly those that are family-owned, disputes regarding the company’s trajectory are frequent. Choices like discontinuing operations, releasing a non-shareholder employee, relocating the business, and significant financial investments can also be catalysts for disagreements among business proprietors.

Minority shareholder claims

In smaller, closely-held businesses, minority shareholders find themselves at a disadvantage due to their limited ownership stake, affording them little influence in altering the organization’s operations. North Dakota acknowledges the rights of these minority shareholders, who are vulnerable to exclusion from pivotal management decisions. Furthermore, the stocks held by minority shareholders often lack marketability, potentially leading to the value of their holdings being tied up in a business that may not prioritize their best interests.

Oppressed minority shareholders may raise contentions about not receiving dividends, improper allocation of corporate funds for personal expenses, or being denied access to essential corporate documents.

Differences in shareholder compensation

Shareholders ought to receive compensation that aligns with their experience, training, expertise, and the standards of their industry. When this balance is not maintained, it can lead to conflicts.

How to resolve business owner disputes

The most economical and least disruptive approach to settle conflicts among business owners is to steer clear of litigation. In certain instances, particularly in larger corporations, this can be achieved through an internal inquiry conducted by the company itself or facilitated by an impartial third party.

However, there are occasions when the relationship among business owners has deteriorated to the point where negotiations are unattainable, necessitating court intervention. In these situations, business proprietors may resort to litigation to uncover the extent of mismanagement through the processes of discovery and trial.

Given the potential high costs and contention associated with litigation, many owners share an interest in preserving the value of the disputed company. Therefore, mediation and arbitration often serve as a constructive starting point, allowing both parties to strive for a mutually acceptable resolution while still providing an opportunity to voice their grievances.

In instances where alternative dispute resolution proves ineffective, litigation may be the sole recourse to address a business owner dispute. An experienced business lawyer and their team can assist small businesses with resolving these disputes, as well as helping new businesses avoid these kinds of arguments in the future.

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