4 Methods to Resolve a Corporate Disagreement through Good Corporate Records Management

Written by: Andrew Gale - Orange County - Small Business Attorney

As corporate attorney’s practicing in Orange County, California, specializing in Incorporation & Corporate Records Management for small business corporations, we receive many interesting questions regarding day to day corporate problems. Many of these issues can be avoided, or at least mitigated, with the correct corporate records management and maintenance processes in place.

Here we share a recent specific, but not unusual, example problem experienced by one of our Orange County clients. As is common with many small business corporations, when they originally formed their corporation they decided that they wanted to be 50-50 owners.

When things are going well, this can be a good thing; they are working together and making equal decisions. A problem, however, arose whereby the two shareholders had a significant disagreement. The details of which are not relevant but suffice to say they had very different opinions as to what should occur in their business. They quickly found that they were stuck, at a standoff, and didn’t know what to do to resolve it.

We counseled them that they had four different ways to think about and work through their dilemma.

Corporate Attorneys Orange County — Managing Corporate Disagreements 

1. Is there a “Dispute Resolution Agreement” in their Corporate Records?

The first place they needed to look is to see whether or not in their corporate records they had a document called the ‘Dispute Resolution Agreement‘.

The purpose of a dispute resolution agreement is that it will set out a formalized process on how shareholders with equal power will actually work through a situation like this; and it is important to note that, if there is such an agreement in effect, it is those rules that must be followed.

This is an important component of good corporate records; disagreements generally can and will occur at some point in most corporations.  Having a formal process for managing disagreements and problem resolution can defuse what can otherwise turn into long winded and disruptive disputes.

2.  The Corporations Bylaws should have a Framework of How the Corporation will Operate & the Formalization of Meetings

The next place to look will be in the bylaws of the corporation. The bylaws of the corporation are essentially the framework of exactly how operations will run within the corporation. One of the pieces of the framework is how meetings are called and run.

There are two kinds of meetings for the shareholders and board of directors. There is the annual meeting and special meeting. In this case, it will probably be a special meeting. There will be a process set out in the bylaws as to how exactly that meeting should be run in terms of: when notice is given, how much time before the meeting the notice must be given, exactly what the agenda items will be.  It is a very good idea, once shareholders get stuck, to formalize the discussion process by exercising the right to call for a special meeting and discussing the particular problem issue.

3.  Retain an Outside Third Party Mediator

A third option will be to retain an outside third party mediator. There are companies in most cities that offer dispute resolution services where you bring in an independent third party, such as a retired judge. In the mediation process, the parties explain the matter to the mediator, and it will be the mediator who will formalize the process and assist the shareholders that are stuck in coming to a resolution to the problem that will be mutually satisfactory to both parties.

4.  Least Ideal Solution would be to Dissolve the Corporation

Finally, the fourth way to approach the issue would be if the two shareholders could agree to actually dissolve the corporation. The corporation could be dissolved on a vote of a person holding 50% or more of the shares and in this particular case that was the actual scenario. That, of course, is probably the worst of all the solutions. Ideally, one of the other three options we discussed earlier would be the most effective way for the shareholders to move beyond the problem and get back to running their company.

We hope this example is helpful to you.  We have also recorded this in video format to help you to think about these processes.

If you have a question, find yourself in a similar situation, or would like help to implement best practice corporation records in your corporation, simply call us at +1 (714) 634-4838 or complete a simple Corporate Records Orange County free trial request form.

Incorporation Attorneys are corporate lawyers based in Orange County California. We are specialists for Incorporation & Corporate Records Management for small business corporations.