In the typical corporate relationship, all companies with multiple shareholders operate under that principle that the majority rules. Those who hold the majority of the shares in the company hold the voting power and the majority interest in the company. However, that doesn’t mean that minority shareholders are without rights. While they typically cannot control the direction of the company, majority shareholders have certain responsibilities to the minority shareholders.
Even minority shareholders are entitled to certain information, rights, and considerations by the sheer virtue of your ownership stake in the business. Unfortunately, in businesses with majority and minority shareholders, there is a certain danger that is always present to the minority. That danger is that the majority shareholders decide to “squeeze” them out by excluding the minority shareholders from company operations, withholding information, and engaging in other activities that would make their investment worthless without the option for a buyout. Although rare in public companies, this is a common occurrence in closed corporations.
Is minority shareholder oppression legal? That is a difficult question to answer. While not strictly illegal, often squeeze outs are strict breaches of the fiduciary duties of the company’s leaders. This means that minority shareholders who are being oppressed do have legal option to retain their rights or get their shares purchased back by the company often at an elevated price as ordered by the court.
If you are a minority shareholder, what are your options?
When it comes to shareholder oppression, you have two options – accept it or go to court. Many minority shareholders choose to wage a series of frivolous lawsuits that often result in bad press for the company as well as present a nuisance with the end result being an out of court settlement. However, these should be a last resort or should only be used if a company does not have set fiduciary duties.
Often, you can take a company to court as a minority shareholder stating that the majority shareholders breached the fiduciary duty of reasonable expectations of the minority shareholders or they broke the fair dealing standard.
Remedies for minority shareholder oppression
If you can prove that the fiduciary duties of the majority shareholders were abandoned, the minority do have a number of oppression remedies that can be made by the courts in their case. In rare cases, the minority shareholders can actually ask for the corporation to be dissolved, but only if there is an overwhelming amount of evidence that their rights were trampled on and they have put a substantial amount of money in, but still choose to remain the minority.
More commonly, the courts will force the majority shareholders to be accountable for their fiduciary responsibilities. However, if the minority shareholder no longer wants to be part of the company that tried to squeeze them out, the court can make the company do a court-ordered purchase of those shares.
Thankfully, many companies now realize that court cases surrounding minority shareholder oppression are a nightmare for their reputation. Now most companies have contractual protections in place in the shareholder agreement such as buyout provisions that are often seen as the preferable alternative to a potentially messy and costly squeeze out.
Unfortunately, if your company doesn’t have such provisions, cases dealing with minority shareholder oppression are often difficult and long. As the courts have to decide how to deal with the rights of the minority shareholders while still respecting the rights of majority shareholders and not destroying the company, those who choose to go to court often have a long and difficult battle ahead. However, their most powerful tool is a resource, determined, and creative attorney like Gilbert Alden PLLC, the most dedicated family and employment attorney in the Minneapolis area.