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Minority Shareholder Oppression: Definition and Remedies
Learn more about minority shareholder oppression and the remedies available to minority shareholder from the business litigation lawyers at Schachter Harris, LLP.
October 23, 2011 /Womens Interest PR News/ -- When a small number of individuals own a corporation, business disputes are common. Yet, what happens when one or more of those owners have all the control in the corporation? What if the controlling shareholders (majority shareholders) use that power to abuse the other shareholders?
This article discusses minority shareholder oppression in close corporations and the business litigation options available to oppressed shareholders.
Minority and Majority Shareholders
A "majority shareholder" is a shareholder who owns more than fifty percent of the shares in a business. The term can also be used to refer to a group of shareholders who, collectively, have more than half of a corporation's shares. In contrast, a minority shareholder is a shareholder who holds less than fifty percent of the corporation's shares.
Generally all shareholders have rights to nominate and vote on directors, sell and purchase shares, receive dividends and receive assets after business dissolution (among other rights). Yet the practical value of these rights may depend significantly on the shareholder's ownership percentage.
Majority shareholders control the vote, often reducing the minority shareholder's influence. In fact, minority shareholders, while they have the right to vote, are very limited in the actual voting power that they have -- a minority shareholder's voting position is only strong when the minority shareholder has a swing vote.
Close Corporations and Minority Shareholders
A close corporation is a corporation with few shareholders. Generally, shareholders participate in the management of a close corporation or are employees of the organization.
Because a close corporation has relatively few shareholders, there is usually not a market for the corporation's stock. This is precisely where problems occur. If a minority shareholder is frustrated with the decisions made in a larger corporation, he or she can simply sell his or her stock to get out. In a close corporation, selling stock can be difficult, if not impossible. Thus, minority shareholders often find themselves trapped as corporate stock owners with little or no control over the business.
Minority Shareholder Oppression
Shareholders elect the board of directors in a corporation. Once elected, the directors set the corporation's bylaws, elect officers and act as supervisors for the corporation. This means that the people who run the business are often elected by majority shareholders. Meanwhile, minority shareholders may not even be able to elect themselves to the board of directors.
By controlling the board of directors, and, thus, the officers of a corporation, majority shareholders often have outright decision-making power. Some majority shareholders use this power to oppress minority shareholders by:
- Squeezing-out / freezing-out minority shareholders
- Refusing to declare dividends
- Reducing profits and dividends (by increasing spending, etc.)
- Denying minority shareholders the right to inspect corporate records
- Diluting minority shareholders' interest by issuing more stock
- Moving business assets out of the business
- Terminating the minority shareholder's employment with the corporation
All of these actions -- and many others -- may be considered shareholder oppression and are actionable in court. However, there are other actions that are considered "discretionary," such as retaining high-cost property. If a court deems a majority shareholder's actions were discretionary, it will likely not find that shareholder oppression occurred.
Minority Shareholder Squeeze-Outs / Freeze-Outs
A squeeze-out -- also known as a freeze-out -- is one of the most obvious forms of minority shareholder oppression. In a squeeze-out, majority shareholders create an environment where the minority shareholders feel they have little choice but to sell their stock to the majority shareholders at a price below market value. Majority shareholders often achieve this by denying the minority shareholders any financial benefit in the corporation.
Squeeze-outs may be illegal, depending on the facts.. If you are a minority shareholder and you believe you are the victim of a squeeze-out, there are multiple remedies that you can pursue to ensure your rights are protected. A Dallas business law attorney can help you determine the best remedy for your unique situation.
Derivative Lawsuits
A minority shareholder can bring a derivative lawsuit on behalf of the corporation alleging that the majority shareholders breached their duty to the corporation and its shareholders. To bring a derivative lawsuit in Texas, the minority shareholder must have had stock in the corporation during the time of the wrongdoing, must fairly represent the interests of the corporation and must have demanded that the board take action against the wrongdoers.
While majority shareholders do not technically have a fiduciary duty to minority shareholders, they do have such a duty to the corporation. Furthermore, courts have held that a fiduciary duty to the minority shareholders may be created when the majority shareholders have full control over a business.
Shareholder Oppression Remedy: Buyout
A buyout is often the preferred solution for everyone involved in a shareholder oppression lawsuit, including minority shareholders, majority shareholders and the court. During a buyout, a court orders the majority shareholders / corporation to purchase the oppressed minority shareholder's stock at a "fair value," which is determined by the court. The remaining shareholders are then able to continue the business.
Shareholder Oppression Remedy: Dissolution
Business dissolution is another remedy available when a buyout isn't feasible or appropriate. Minority shareholders may bring proceedings to dissolve a close corporation if they believe that the directors or others in control of the corporation have acted oppressively, illegally or fraudulently.
Courts may be reluctant to dissolve a business unless there is a clear showing of oppression. They will look at many factors -- such as the relationships between the shareholders, special circumstances and expectations of the corporation's members -- in order to determine whether shareholder oppression has occurred.
Whether you are a minority shareholder who is the victim of shareholder oppression or you are a majority shareholder accused of oppression, an experienced Texas business law attorney can help protect your rights.
Article provided by Schachter Harris, LLP
Visit us at www.schachterharris.com
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