What Is Shareholder Oppression, Exactly?

Shareholders of large, publicly-traded corporations have a fair amount of flexibility if they feel they are being mistreated. Some shareholders may vote out an incompetent or negligent board member. If all else fails, shareholders may simply sell the stock. 

Minority shareholders—shareholders who own less than 50 percent of a corporation—are much more vulnerable in privately held companies. For example, they aren’t privy to the fair market value of their shares. This represents a huge obstacle to effective exit plans for minority shareholders. 

Fortunately, there are a number of legal actions these shareholders can take if shareholders oppression occurs. We covered one of these options—the right to inspect records—last month in our blog about the rights of LLC members. However, how do you know when shareholder oppression actually occurs? We’ve listed several of the most common reasons below. 

Squeeze-Outs

For a variety of reasons, majority shareholders might be motivated to squeeze out minority shareholders. A squeeze-out occurs when minority shareholders are more or less forced to sell their shares—sometimes at a loss. This can happen when majority shareholders set up a separate corporation and “sell” existing shares to the new corporation. Without any leverage, the minority shareholders could be forced to sell their stock. 

Shareholder Agreement Violations

A strong shareholder agreement can be one of the most effective ways to prevent oppression of minority shareholders. Any violation of the shareholder agreement by majority shareholders could be treated as a breach of contract claim. 

Breach of Fiduciary Duty

Majority shareholders have common law obligations to act for the good of the company and not simply for themselves. Minority shareholders could have a valid claim if a breach of the majority shareholder’s fiduciary duty results in tangible losses. This goes beyond simple disagreements over the direction of the company. 

Remedies For Shareholder Oppression

As we covered last month, oppressed shareholders may formally request to inspect certain documents and other components of the business. If that action does not yield results, minority shareholders might have the ability to bring a derivative suit against majority shareholders. In this legal action, the minority shareholders are effectively acting on behalf of the corporation. Before filing a derivative suit, a minority shareholder must bring his or her concerns to the board and request an action to remedy the alleged harm.

Derivative suits are heavily process-oriented and generally considered to be the last resort. We highly recommend for minority shareholders to contact a qualified business attorney before taking any actions against majority shareholders. Bryant Taylor Law is focused on helping business owners and entrepreneurs resolve disputes and protect their interests. Call our team to set up your business strategy session.

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Bryant Taylor Law

Our firm features two experienced and knowledgeable attorneys who understand the emotions and determination that drive committed entrepreneurs. We also have a thorough knowledge of the legal challenges facing business owners today.

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