A corporation, no matter which form it takes, comes into existence once the individuals creating it satisfy the laws of the state where it is being incorporated. All corporations are created and established under the laws of a specific state. Corporate management and operations are governed by the laws of the state where they are incorporated and the state(s) in which they do business.
All states’ corporation laws require corporations to have specified officers and directors to exercise authority on behalf of the corporation. Corporations must have capital to operate. They issue shares of stock to raise equity capital. Shares of stock represent part ownership of the corporation and entitle the shareholder to certain specified rights. Shareholders also have the rights granted to shareholders under applicable state law.
Different types of corporations exist. A “C corporation” is a very common form of corporate entity. C corporations are taxed separately from their owners. C corporations can have unlimited numbers of shareholders with varying degrees of rights and priorities in payment of dividends. The shares may be traded on a public exchange such as the NYSE, or may only be transferred privately.
Two other common forms of corporate entity are S corporations and LLCs. These are very different from C corporations in a number of ways. They have limited numbers of shareholders. S corporations and LLCs are not taxed separately from their owners. Instead, their profits are passed to their owners and taxed on their personal returns.
Many other types of corporations exist. One well-known example is non-profit corporations. Also, some states also allow specialty corporations- these are created for limited and specific purposes.
No matter what form of corporation, the board of directors has a duty to do what is in the best interests of the corporation and all of its shareholders. Shareholders under state law and under the corporation’s governing documents are given the right to vote on certain matters that come before the corporation. Majority vote of the shareholders prevails.
The board must act in the best interests of all of the shareholders, but the board has no duty to look out for the best interests of the minority shareholders as such. “Minority shareholder” is defined as any shareholder who holds 49% or less of the shares of the corporation. Minority shareholders do not have voting control of the corporation. In a C corporation, the number of shareholders who are minority shareholders can be considerable.
Minority shareholders are given certain rights by state laws. The extent of the minority shareholders’ rights depends on the corporation’s governing documents and the state law where the corporation is incorporated. Every state recognizes minority shareholders’ rights to:
- Access the corporation’s records, including minutes of all shareholder and all board of director meetings, accounting records, all financial statements, all advances or expenses paid to any company employees, information concerning secondary offerings of the company’s stock, and any other official records of the corporation.
- Expect company officers and directors to perform in the company’s best interests and in compliance with standards set forth in any shareholder agreement, and question them about their decisions.
- Benefit from the corporation’s activities.
- Vote their shares.
If sufficient numbers of minority shareholders work together, they may be able to amass a vote of 50.1% or more and become a majority vote.
At times, minority shareholders may vehemently oppose the actions of the board. Minority shareholders who believe the board has breached its duty or mismanaged the corporation may petition a court to intervene and issue an order directing the board to take certain actions. Examples include:
1. Major re-organizations: A minority shareholder has the legal right to dissent to certain actions. Those include changes to the corporation’s governing documents regarding the provisions concerning the issuance or transfer of shares, restrictions on the business the corporation may carry on, the transfer of all or substantially all of its property, and certain other major actions. If the shareholder follows the proper procedures, the court may order the corporation to purchase that shareholder’s shares for a value determined by the court.
2. Derivative actions: If any shareholder believes the directors have not acted in the best interests of the corporation, and the directors refuse to enforce the rights of the corporation against any officer, director or employee, the shareholder may seek permission from a court to initiate a lawsuit in the name of the corporation.
3. Oppressive actions: If a minority shareholder feels that the business of the corporation has been carried on with intent to defraud any person, or the powers of the directors have been exercised in a manner that is oppressive, unfairly prejudicial, or that unfairly disregards the minority shareholder’s interest, the shareholder may seek judicial relief in court. Likewise, if a minority shareholder believes the controlling shareholders are trying to “squeeze out” the minority shareholder by taking such action as refusing to declare (or declare higher) dividends when the company is profitable, refusing to distribute earnings as bonuses or retirement benefits, siphoning off earnings through exorbitant salaries and bonuses (disguised dividends), or using a variety of other common squeeze-out techniques, the minority shareholder may have grounds to seek judicial relief.
What to Do If You Are a Minority Shareholder in a C Corporation and Think You Are Being Treated Unfairly
Seek help from an experienced litigation and dispute resolution attorney. A savvy attorney can analyze the facts of your case and determine whether your rights as a minority shareholder are being improperly trampled or ignored. An attorney with experience in corporate and partnership disputes can work with you to develop an effective strategy to protect the value of your assets.