Expert Witness: Business Owner Conflicts with ShareholdersBy HG.org
Conflicts between business owners and shareholders are not uncommon. The duties and direction between these two groups are often opposing. These conflicts are often more pronounced when dealing with smaller businesses. These businesses may not have as extensive oversight as publicly-traded companies do. Recognizing the adverse nature between the parties can provide an expert witness with the background to explain the conflict to a judge or jury.
Approach to RiskBusiness owners and investors may have adverse beliefs regarding the level of risk that they are willing to take on. Shareholders often want high returns through capital gains and dividends, but they may be averse to risk because they do not want to lose their investment. However, business owners or other upper management are often paid through high executive salaries that are not directly tied to the rate of return on stocks. Business owners may not be as averse to risk, which may cause conflict between the owners and shareholders.
Likewise, business owners and shareholders may have different approaches related to tax treatment. Management may prefer to have higher salaries because they are tax deductible and cause lower taxable income. In contrast, shareholders may want to minimize their tax expenses, causing difficulty between the return requirements desired by shareholders and the long-term goals of the management team. Additionally, the management team may be interested in involving multiple companies quickly even if this might mean greater risk by having more debt. Since this negatively impacts the profit of the business, this approach can adversely affect the shareholders’ expected return.
Capital ApproachAnother area where the shareholders and business owners may not agree pertains to the business’ capital. Many shareholders do not want to see extra money on the business’ balance sheet because they view it as profits that are not rightfully being distributed to them through the receipt of dividends. However, management can have very strong reasons for holding onto extra cash, such as wanting to keep a safe reserve to handle crises or to take advantage of a new opportunity. Management might want to keep extra capital to invest in new projects. This desire may be at odds with the shareholders who want to maximize their own profits and may not want to wait for a new investment to pan out. Issuing new shares can dilute the value of other shareholders’ shares. Shareholders can minimize the amount of risk or conflict by reviewing financial statements on a typical basis and asking questions when necessary.
Control of BusinessAnother potential source of conflict is how the business is controlled. While owners may believe that they are in control, the shareholder’s agreement may state that they are in control of major decisions of the business. Additionally, business owners may be senior employees that are responsible for generating goodwill and revenue in the business. Problems can often be avoided when the parties are all cooperating together. However, if the parties do not agree on how to operate the business, they may lose trust between each other and personnel problems may arise. The shareholder’s agreement may indicate how to adjust how control is handled in the business or how an owner can buy out a shareholder who does not share the same vision for the business.
Mixing debt and equity can often help preserve a specific formula for control. Boards of directors may take action that causes the company’s shares to lose value if there is a hostile takeover, which causes shareholders to receive higher returns while cutting off the existing management team.
Court InterventionThe court may become involved in the business at some point if the shareholders are not satisfied with the company. The court often has the authority to make a buy-out of one party. This may result when there has been a breakdown of relationships from which there is likely not going to be recovery. Such breakdowns can often result in the loss of confidence between the shareholders and management team. Additionally, commercial operations may be adversely affected.
Expert Witness AssistanceWhen shareholder disagreements are adversely affecting a business, an expert witness may be consulted along with a business lawyer. An expert witness can review the evidence related to the business conflict. He or she can evaluate the damage caused to the business. He or she can discuss possible ways to resolve the conflict. Business owners or shareholders who are considering litigation or another intensive remedy may wish to contact an expert witness to learn more about what he or she may be able to testify about.
While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.