Minority Shareholder Rights and Why They Matter
In a corporation, some shareholders hold enough shares of the corporation stock that they can exercise control over the corporation. A minority shareholder is any shareholder that does not exercise control over a corporation. By definition, minority shareholders own less than 50% of the company’s outstanding shares.
Minority shareholders have certain legal rights. Their minority shareholder rights are determined by the law of the state where the company was incorporated.
Every corporation, large or small, has shareholders. In large corporations with stock bought and sold on a public stock exchange, shareholders can easily sell their shares. However, shareholders in privately held, close corporations (where shares are owned by a small number of persons) cannot as readily sell their shares.
In privately held corporations, especially smaller privately held corporations, the stock cannot be readily valued and sold on a public exchange. Without state laws that grant minority shareholders in close corporations certain rights and protections, those minority shareholders are particularly vulnerable to the oppressive actions of the controlling shareholders, and they have little ability to sell their interests quickly or protect their investment.
When a corporation, acting through its officers, directors, or majority shareholders, violates the rights of a minority shareholder, the minority shareholder can bring an action against the corporation. If you are a minority shareholder in such a case, you should consult a litigation and dispute resolution attorney to discuss your case. An attorney with experience in these matters can help you understand and protect your rights.
Rights of Minority Shareholders in Most States
Any shareholder in a corporation, whether public or private, has certain important rights pertaining to the corporation. Examples of shareholder rights include the right to vote at annual shareholder meetings, to review information about the company, including the company books and records and a list of all shareholders, and to vote on major corporate events such as selecting directors, approving mergers, dissolution, major asset sales, and amendments to the corporate charter documents.
In private corporations, minority shareholders need additional protections against attempts to improperly exploit the situation. The extent of these additional rights afforded by state law varies from state to state. Nearly all states recognize certain minority shareholder rights. In addition, it may be possible to have your attorney negotiate certain shareholder rights and remedies specific to your situation and even have them incorporated into a shareholder agreement.
Among the widely recognized minority shareholders rights are:
1. Fiduciary Duty Owed by Majority Shareholders. Under most states’ corporation laws, the majority shareholders owe a fiduciary duty to the minority shareholders. This means that majority shareholders must deal with minority shareholders with candor, honesty, good faith, loyalty, and fairness. Minority shareholders have the right to expect company officers and directors to act in the company’s best interests and in compliance with the shareholders agreement. Ways that majority shareholders can breach this fiduciary duty is when they form other companies to compete directly with the corporation, pay themselves high salaries, or sell stock of the company on terms favorable only to themselves.
In some cases where the majority shareholders have breached a fiduciary duty to a minority shareholder, the minority shareholder may be able to file a shareholder derivative action. This is a special kind of lawsuit available to a shareholder when corporate management knows that an officer, director, employee, or shareholder has engaged in self-dealing and fails to protect the interests of the corporation. In this kind of lawsuit, a shareholder can ask a court to allow the lawsuit to proceed in the name of the corporation.
If a minority shareholder believes that corporate management has acted with intent to defraud any person, or exercised power in a manner that is oppressive, unfairly prejudicial, or that unfairly disregards the minority shareholder’s interest (often reducing the value of the minority’s interest), the minority shareholder may initiate a lawsuit against the majority shareholder(s) and seek an appropriate remedy.
2. Access to Company Financial Records. As mentioned above, every shareholder has the right to attend company meetings, vote the shares, and review the company’s books and records. To exercise these rights, shareholders have to follow applicable state law and company procedures. For access to company information, for example, the shareholder usually must make a written demand on the corporation and put forth a proper basis for the request.
3. Minority Discount. A minority discount is assigned to minority shares when a private company values its shares in preparation to sell or transfer ownership. This discount on minority shares reflects the fact that minority shares are not as valuable because they do not provide as much company ownership as other shares. Ironically, minority shareholders can buy shares for less than other investors and still receiving many of the same benefits of stock ownership. This is one advantage to being a minority shareholder.
4. Benefit from Shareholdings. Minority shareholders have the right to benefit from such events as receiving dividends and selling shares for profit. However, these rights can be suppressed by those in control. For example, the company directors can decide not to pay dividends or not to purchase shares from shareholders. If a minority shareholder believes a majority shareholder is suppressing minority shareholder rights to benefit from shareholdings, it is time to consult with an experienced attorney. The attorney can help the minority shareholder follow the proper procedures and force the corporation to purchase his or her shares for a value determined by a court.
Consult with an Experienced Litigation and Dispute Resolution Attorney
Taking steps to protect your rights as a minority shareholder is important. A failed attempt to assert minority shareholder rights can result in significant expense to the unsuccessful minority shareholder. To make sure you protect your rights and your financial interests, you need the expertise of a seasoned attorney. An attorney with expertise in shareholder litigation and dispute resolution can evaluate your case, and help you plan and implement a successful strategy.