Partnership and Shareholder Disputes: Common Reasons for Litigation

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In business, partnership and shareholder disputes can arise due to a wide variety of reasons. Critically, these types of conflicts can impact a company’s reputation, growth, and bottom line. Although disputes between partners and shareholders can sometimes be settled outside of court, litigation may be required to resolve such matters when attempts at alternative dispute resolution fail. This legal blog discusses five common reasons shareholder and partnership dispute litigation occurs and a shareholder dispute attorney is needed.

1. Breach of Contract

Contracts help to ensure each party understands their rights and obligations under the agreement that was entered into. They can also protect a company’s assets and prevent communications from being misinterpreted. When one party disregards their obligations under the terms of a contract, it may be necessary to take legal action in order to mitigate risk and defend your company’s interests.

Breaches of contract are among the most common causes of action when it comes to business-related disputes between partners and shareholders. They can occur as a result of conflicts regarding decision-making, profit allocation, the division of dividends, management responsibilities, and ownership interests. A plaintiff who prevails in a breach of contract lawsuit may be entitled to recover direct damages, consequential damages, and liquidated damages. Other remedies can include equitable relief — and potentially punitive damages in limited cases where the breach of contract was the result of fraud or other serious misconduct.

2. Breach of Fiduciary Duty

Controlling shareholders owe a fiduciary duty to minority shareholders — just as partners owe this duty to each other and the partnership. Under California law, four fiduciary duties are recognized: the duty of care, the duty of loyalty, the duty of obedience, and the duty of good faith and fair dealing. Simply put, a fiduciary duty is one’s obligation to act in the best interests of the company. Failure to do so can result in the party who breached this duty to be required to compensate those who suffered damages.

3. Business Fraud

If it is believed that a shareholder or partner is committing theft or another type of fraud, a legal claim may be raised. Business fraud can come in the form of misrepresentation, fraudulent conveyance, embezzlement, misappropriation of trade secrets, and various other misconduct. In such cases, the aggrieved party may not only be able to pursue a claim for fraud, but also for breach of contract or fiduciary duty.

4. Tortious Interference Claims

While claims of tortious interference frequently involve third parties and a company’s competitors, they can also involve business partners or shareholders. Tortious interference claims commonly arise due to a current or former partner or shareholder violating a non-compete, trade secret, or confidentiality agreement. This claim can also be raised in connection with fraud, client poaching, the obstruction of a business relationship with a third-party, or as a result of being coerced into violating a contract.

5. Unjust Enrichment

Unfortunately, a party in a business relationship may sometimes take wrongful advantage to benefit at the other party’s expense. When this happens and there is no written contract in place to assert a claim for a breach, the party who suffered harm may be entitled to pursue a claim under the equitable principle of unjust enrichment. Absent a formal contract, an aggrieved party may also be entitled to a monetary remedy under the legal doctrine known as “quantum meruit.”

Resolving Partnership and Shareholder Disputes

In the event a partnership or shareholder dispute arises, it’s crucial to resolve the conflict efficiently and effectively. Mediation, arbitration, and negotiation are common methods that can be utilized to settle legal matters among partners and shareholders. These forms of alternative dispute resolution can save parties the time, money, and resources that would be spent litigating a matter. They can also help to ensure a dispute is resolved amicably in cases where the parties wish to continue the business relationship and the company’s operations.

However, in cases that are particularly contentious — or when attempts at settlement are unsuccessful — the only option may be to proceed to litigation. California law permits a partner to bring a case into court in order to enforce their rights under a written partnership agreement or pursuant to a statute. A partner may be entitled to sue to protect their own interests, including those connected with the partnership relationship. Similarly, shareholders may also need to pursue litigation when it becomes necessary to safeguard their financial and legal interests.

Contact a California Partnership and Shareholder Dispute Attorney

If you are facing a partnership or shareholder dispute, it’s crucial to have a skilled partnership and shareholder dispute attorney by your side who can implement a strategy to achieve success. At White and Bright, LLP, our knowledgeable business attorneys work with partners and shareholders in California for a wide variety of business disputes. We welcome you to contact or call us at (760) 747-3200 to learn more about our legal services.

You might also be interested in:

Understanding Breach of Contract Elements

Contract Disputes