Shareholder and Partnership Disputes: 5 Common Causes of Action in Litigation

While it is possible to resolve partnership or shareholder disputes without the filing of a formal lawsuit, sometimes it is necessary to seek legal intervention and assistance from the courts.

When partners or shareholders in a business find litigation necessary to resolve a dispute, there are some common causes of action – or legal grounds – upon which civil lawsuits can be brought. These include:

1. Breach of Contract in Partnership Disputes

Breach of contract claims are the most common causes of action in business disputes. For parties to a partnership or shareholder agreements, contractual breaches can involve any number of disputes over rights, responsibilities, and important characteristics of the business, including:

• Ownership interests
• Management duties
• Compensation
• Decision making
• Profit allocation
• When and how to issue dividends and compensation
• Admission of new partners or shareholders
• Buy-sell agreements

Whether you are pursuing or defending against a lawsuit over an alleged contractual breach, or wish to mitigate your risks of facing one in the future, you need to know what’s in your contract and what remedies are available for a breach.

A qualified attorney can help review your options based on your prevailing contract, and help you limit your exposure to future litigation by properly drafting partnership agreements, shareholder agreements and related contracts to ensure they clearly define roles, processes, and each partner’s expectations.

2. Business Partners Owe a Fiduciary Duty

Because the success of a partnership relies on the trust between partners to do what is best for the business, business partners are by law fiduciaries who owe duties to the partnership, including duties of:

• Loyalty
• Good faith and fair dealing
• Candor
• Refrain from self-dealing
• Full disclosure

A breach of fiduciary duty can cause significant harm to a partnership, and create disputes that often require litigation to resolve. When plaintiffs prevail in their breach of fiduciary duty claims, they may be entitled to damages and equitable remedies such as an accounting, fee forfeiture, constructive trust, profit disgorgement, injunction, and more.

Similarly, controlling shareholders have a fiduciary duty to minority shareholders. If a controlling shareholder is not acting in the best interest of the business, owners with minority interests may seek damages or equitable remedies based on the majority’s improper benefit (i.e. a disgorgement of profits, court-ordered dividends, injunctive relief, buyout, etc.)

3. What to Do When a Business Partner Commits Fraud

Fiduciary duties also prevent partners and majority shareholders from engaging in fraud. If you suspect a business partner or shareholder is stealing, you may be able bring claims of fraud in addition to breach of contract and fiduciary duty.

Business fraud may include:

• Fraud, or the intentional representation of facts known to be false in order to deceive.
• Misrepresentation, or the representation of false information believed to be true.
• Fraudulent conveyance / transfer
• Misappropriation of trade secrets
• Patent infringement or trademark infringement
• Embezzlement

Preventing fraud requires a proactive commitment to the protection of trade secrets, intellectual property, and other important business information. Parties entering into partnerships or investing in a business should create comprehensive safeguards for the business’ most important assets, and be prepared to enforce agreements when fraud or misrepresentation occurs.

4. What Is Tortious Interference in a Business Partnership? 

Businesses often rely on a web of contracts and relationships with agents, lenders, vendors, and distributors, among many other parties. When someone unfairly disrupts one of these relationships or engages a partner, shareholder, or party with whom you are contracted to renege on an agreement, you may have grounds to pursue claims over tortious interference.

Tortious interference claims commonly involve competitors and third-parties, but they can also involve current or former partners who interfere with existing contracts or prospective business as a result of:

• Violating partnership or shareholder agreements, non-competes, or confidentiality agreements
• Client poaching
• Fraud or misrepresentation
• Being forced, threatened, influenced, or coerced into violating a contract
• Obstructing business relationships with third parties

Parties who bring tortious interference claims must prove a defendant’s actions exceeded what would be considered “fair” competition, such as threatening a third party to not do business with a competitor.

5. Resolving Shareholder Disputes With an Unjust Enrichment Claim

Sometimes, one party in a business relationship may benefit at the expense of the other. When this happens and there is no express contract, the equitable remedy of unjust enrichment may apply.

Claims for unjust enrichment have three elements:

1. A benefit received;
2. At the plaintiff’s expense;
3. Under circumstances that make it unjust for the defendant to retain the benefit without commensurate compensation.

While not a common claim, unjust enrichment may be an option for legal remedy in situations where there is no contract (and thus no grounds for breach of contract) and no fraud (as there is no requirement for malice or intent; only that a defendant holds property or money belonging to the plaintiff). There may be basis for a claim if there was an agreement, but the agreement is unenforceable or otherwise void.

Shareholders may claim unjust enrichment if majority shareholders or directors received revenue from a business and did not share a proportional share of the profits with other owners or shareholders.

Partners considering claims for unjust enrichment may also consider other equitable remedies under Texas law, including claims for quantum meruit (which can also apply when plaintiffs seek payment for services rendered in absence of a contract) or a cause of action for money had and received.

While proactive protections can go a long way in mitigating exposure to litigation, lawsuits are sometimes the only way to resolve conflict among partners. At Hendershot Cowart P.C., our business law and litigation lawyers help clients across Texas explore their options for bringing or defending against claims over a range of partnership and shareholder disputes. To discuss your matter with an attorney, contact us.