Shareholder Disputes at Closely-Held Businesses

Over the last twenty years, an increasing number of attorneys have contacted me about litigation among shareholders of closely-held businesses.

Shareholders of closely-held businesses in various parts of the United States are embroiled in litigation with each other over the amount of compensation that one or more of the shareholder-officers received.

These lawsuits seem to be increasingly common at professional service firms, including law firms, medical practices and CPA firms. These disputes have also become common in both old economy and new economy businesses.  The older businesses may have been passed along to the second or third generations of the founders’ families. The new economy companies involve e-commerce or intellectual property that has become valuable and the creators feel that they deserve compensation for work they did in the development stages.

In many of these cases, some of the shareholders may not have been aware of the compensation terms between their companies and the officers. Perhaps those terms were unwritten or the officers were able to set their own bonus amounts.  Once other shareholders find out how much the officers were paid, they are often compelled to bring legal action against the officers, even though those officers may be their siblings, cousins or long-time friends.

One of my professors used to say that there are no friends when it comes to money, and these cases illustrate what he meant.

This type of litigation quickly consumes considerable resources, including time and money. Customers and employees who are not directly involved in the disputes can also be affected.

By analyzing the officers' qualifications, duties and accomplishments, I try to reach consensus by determining fair and reasonable compensation amounts for the officers. With some explaining, this may lead to a resolution of the matter.

Or, if given the opportunity early enough, we may be able to help prevent these disputes. To do so, we would need to clearly outline the duties and expectations of each officer, much the same way these companies may do with non-owner employees.  Each officer could be given goals with the potential for performance bonuses when the goals have been reached.  The idea is to create a win-win for all shareholders and all officers.  Get good results for the business - get a bonus.  Yet all too often these arrangements are not thought out, or agreed upon, in advance.  And when they are not, the business may become a "disruptor"...and not in a good way.