Minority Shareholders and Their Rights

Posted July 17, 2020

  • Minority Shareholders and Their Rights

Unlike a publicly held corporation, closely held corporations provide unique opportunities for majority shareholders to oppress minority shareholders. This is true because the controlling majority can often dictate how the corporation is to be run. Further, there is often not a fair market where the minority can sell their shares as they are not publicly-traded. Thus, a minority shareholder cannot safely stay with the closely held corporation nor profitably leave the corporation.

Shareholder oppression refers to conduct that substantially defeats the “reasonable expectations” held minority shareholders in committing their capital to a particular venture. Minority shareholder oppression comes in many forms. However, in almost all cases, the majority acts in their own best interest to the exclusion of the minority.

Examples of Minority Shareholder Oppression

  • “Freezing out” or “squeezing out” the minority by refusing or limiting access to the corporation’s books and records
  • Excluding the shareholder from a meaningful role in the company
  • Terminating the shareholder’s employment
  • Authorizing transactions with closely related companies for the sole purpose of economically harming the minority

Tools to Combat Minority Shareholders Oppression

  • Court intervention to stop oppressive conduct
  • Order full disclosure of the company’s books and records
  • Voiding and unwinding corporate transactions
  • In severe cases, dissolve and wind up the business affairs of the company

Relief granted by a court could also include the buy-out of the minority shareholder’s equity interest in the business. Additionally, the court may award compensatory damages if appropriate. This typically requires the need for business valuation experts to determine the fair-market value of member’s interest in the company.

Every case of shareholder oppression is unique. It is imperative that victims of minority shareholder oppression seek the advice of legal and financial professionals to develop a strategy to combat oppression to meet the reasonable expectations of the minority shareholder.

Feel free to contact me if you have any questions about this article or concerns about your rights as a minority shareholder.

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