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Surviving Shareholder Litigation with Your Business – And Your Sanity – Intact

Shareholder litigation: Those two words designate an action that can be profoundly disruptive to a business, because the mere existence of such a pitched battle between owners can bring a closely held company to a grinding halt.

When shareholder litigation is pending, the owners obviously have issues with each other severe enough to warrant filing suit.  Those cases can involve allegations as nasty as fraud, mismanagement, or even embezzlement.  Often, one shareholder has had his or her employment terminated, and is no longer on site, but is on the outside, looking in.  Even more often, the shareholders involved in litigation against each other are still working together – or trying to – sometimes in very close quarters.  This may be the most difficult type of shareholder litigation of all, especially when the shareholders are family members.

Shareholder litigation where the owners still work together can seem to take over a company.  Every decision made, every act undertaken, is viewed through the litigation prism.  Why is he asking me to do this?  Do we really need it done, or is he somehow trying to make me look bad or set me up?  Why is she asking for that document?  Does she need it for the business, or is it going to be a trial exhibit?  Obviously, such an atmosphere can be poisonous, and sometimes even fatal, to a company.

It goes without saying that, during the pendency of shareholder litigation, decisions should be made with the company’s best interest at heart.  Of course, while this may describe your thought process, it may not describe your fellow shareholder’s, leading to confusion and even chaos.  For example, when one owner tells the bookkeeper to approve and reimburse for a certain expense, but the other owner directs the payment not to be made, the situation can become very tense, whether the expense is an advertisement, business travel, or a new computer.  Or, when one shareholder wants to grow the business, but the other insists on maintaining the status quo until the litigation is over, the impasse can be detrimental and demoralizing to the other employees.

When your business partner does any of the above, and acts in a way that harms the company, the action you take may be based entirely on the judge in your case.  In New Jersey, some judges are more receptive to getting involved in business disputes between litigants, and some less so.  Some judges will attempt to resolve such disputes on a conference call, while others will require the filing of a formal motion for relief.  Often a judge will appoint a “Special Master” to resolve such disputes, either with both parties agreeing to abide by the resulting decision, or with the right to appeal that decision to the judge.  However the judge decides to resolve the issues, an attorney with experience in shareholder litigation is critical.

It takes a special touch to present such issues to the court or Special Master, and not sound like your client is a whiner.  Often a client will be tempted to complain to the court about every little issue.  However, an attorney experienced in such cases will know what issues are important enough to bring to the court’s attention; and which ones should just be ignored – at least for the time being.  When interviewing an attorney to represent you in shareholder litigation, ask what creative solutions he has utilized to help his clients deal with a business partner as unbearable as you know yours will become once the Complaint has been filed.