5 Ways Shareholder Disputes Threaten Trade Secrets

Shareholder disputes and business breakups can disrupt operations, drain resources, and damage key relationships. An equally destructive but often overlooked consequence is their impact on a company’s trade secrets. These critical assets rely on controlled access, reliable processes, and trust. When those conditions break down, trade secrets are at risk.

Understanding how internal conflicts expose a company’s information assets can prevent catastrophic losses. Here are five scenarios to watch out for when a shareholder dispute is on the horizon.

1. Self-Dealing Diversion of Trade Secrets

Shareholders have been known to divert a company’s trade secrets to support outside ventures or personal business interests. For example, a shareholder might surreptitiously use the company’s proprietary market research and customer intelligence to divert business to a separate consulting firm.
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Whether such conduct triggers a shareholder dispute or follows in the wake of one, the result is that the shareholder’s side business gains an unearned advantage while the company’s investment in developing trade secrets goes up in smoke.

2. Freeze-Out Through Information Control

Trade secrets often reside in knowledge controlled by key shareholders. In some businesses, a founder may be the only person who understands core processes, formulas, or development plans because that knowledge was never documented or transferred. In others, majority owners can block minority shareholders from accessing performance metrics, financial records, or strategic plans.

This tactic can give the majority unfair leverage and make it impossible for others to detect misconduct, evaluate company performance, or determine value.

3. Valuation Manipulation Through Trade Secret Suppression

Controlling shareholders seeking to buy out minority owners under a buy-sell agreement or in legal proceedings may downplay or omit key trade secrets to suppress the company’s appraised value. Trade secrets can be difficult to quantify and therefore become easy targets for selective omission.

Ignoring key trade secrets or falsifying their value may allow the controlling group to unfairly acquire the minority’s stake at a reduced price. Leaving out a process that took years to refine or an algorithm that drives sales can distort value calculations.

4. Leakage of Trade Secrets During Internal Conflict

Disputes can trigger hurried file transfers, changing permissions, and conflicting instructions. Without consistent, enforceable protocols and monitoring, files can easily be downloaded to personal devices, forwarded to outside email accounts, or duplicated without authorization. Employees may also share information out of misplaced loyalty or confusion about who is in charge.

In this environment, customer lists, pricing models, or engineering specs, to take a few examples, can disappear without anyone noticing until it is too late.

5. Misrepresentation or Loss of Core IP Ownership

Trade secrets themselves may be at the heart of a shareholder dispute. Core IP may have been developed before incorporation and never formally assigned, or a shareholder may claim personal ownership of essential processes or technology. Unreleased product designs, prototypes, test results, and strategic development plans are particularly vulnerable.

Without clear documentation, a departing founder may assert rights to use these assets in a competing offering. Uncertainty in this area can erupt into conflict and put the enterprise at risk.

Protection Strategies in the Shareholder Context

These scenarios illustrate how shareholder disputes can directly jeopardize the confidentiality and value of trade secrets. Trade secret exposure during shareholder disputes can be reduced through proactive measures and appropriate documentation.

Confidentiality Agreements: Governance documents should include clear confidentiality and non-use obligations that bind shareholders individually, survive an exit, and prohibit using company information in competing ventures or related businesses without permission.

IP Assignment Agreements: At formation and when new shareholders join, use disclosure and assignment provisions to clarify ownership and confirm that inventions and innovations connected to the company’s work belong to the business, not to individual shareholders.

Access Controls: Except where law grants inspection rights, shareholders should not have automatic access to sensitive trade secrets. Policies should specify when access is allowed for governance purposes and when approval is required. Audit logs help deter unilateral withholding and quiet misappropriation during a dispute.

Dispute Protocols: Put procedures in place that activate when a conflict emerges or a shareholder announces an exit. These may include adjusting access rights, requiring return of confidential materials, and prohibiting any changes to permissions without board approval. This helps prevent copying, deletion, and access manipulation.

Governance Checks: Require board or committee approval before granting, expanding, restricting, or removing access to critical trade secrets. This adds an internal control layer and helps prevent arbitrary or self-interested decisions during periods of tension.

Trade secrets are often a business’s most valuable assets, and they are especially vulnerable during shareholder disputes and business breakups. By understanding the pressure points and implementing sound trade secret management practices early, business leaders and counsel can safeguard these assets, protect shareholder interests, and avoid damage and disruption to the company.