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3 ways a business can violate the rights of a shareholder

On Behalf of | Feb 27, 2023 | Business Law |

Shareholders play a key role in publicly-traded organizations. They provide financial resources that can help a company establish operations or allow it to expand. They also influence the culture and direction of the company by voting at shareholder meetings to determine who holds leadership positions and help guide the direction the company takes.

Most corporations respect their shareholders and abide by their contracts with these valuable investors. However, sometimes shareholders experience misconduct on the part of the organizations that they have helped support. Occasionally, shareholders may need to take legal action to assert their rights when a major violation, like the three below, occurs.

1. They lose voting rights

Sometimes, the majority shareholders or prior owners of an organization will try to freeze out the minority shareholders. One of the ways they may achieve this goal is by refusing to let shareholders vote and have any real say on how the company operates. Scheduling meetings and not notifying shareholders or preventing them from speaking up during such meetings can be a violation of the rights of those invested in the organization.

2. They don’t receive dividends

Shareholders should technically receive financial compensation for their investment in the company when it succeeds. However, companies may try to structure or delay payments as a means of forcing shareholders to sell their interest in the company. When the company has generated profits but shareholders don’t receive their fair share, they may be in a position to take action.

3. They experience a contract violation

Organizations typically have very thorough agreements with the shareholders that invest in them. There may be certain rights extended to the shareholders beyond the standard expectations. When businesses make promises to shareholders in writing and then do not follow through on them, disappointed investors may have grounds to take legal action against the business.

Shareholder disputes can be expensive for an organization and can also weaken the relationship that investors have with the company they have previously helped to support. Thankfully, recognizing when business litigation is necessary to resolve a shareholder dispute can help people to protect the resources they have invested in a company and their rights more broadly.