The people in control can be majority shareholders, or members, officers, directors, or managers.
As a minority owner, you have certain legal rights. If others are denying you those rights or abusing their power, you need the assistance of an experienced shareholder rights attorney at Miller Law.
All owners of corporations, partnerships and limited liability companies have certain fundamental rights. These rights extend to minority shareholders, partners, and limited liability company members.
Legally, those who control a company cannot abuse their power in ways that fundamentally harm the minority owners’ rights. This includes engaging in behavior toward minority shareholders that is fraudulent, illegal, oppressive, or willfully unfair. It also includes conduct that constitutes a breach of fiduciary duties. Nor can they engage in behavior that harms the corporate entity.
Some of the basic rights typically afforded to all shareholders include:
- The right to attend and vote at shareholder meetings,
- The right to inspect financial records,
- The right to participate in electing directors, and
- The right to participate in the adoption or modification of bylaws.
Whether conduct by the majority or those in control constitutes oppression requires a case-by-case analysis.
To gain a better understanding of your rights, consult with an experienced corporate attorney as soon as possible. Your attorney can assist you by defending your rights and fighting to help you overcome shareholder oppression.
Why Are Minority Owners Oppressed?
The reasons that someone might oppress a minority owner are virtually limitless. As with many business-related legal conflicts, some of the most common scenarios involve disagreements about power and money.
A minority shareholder may object to how the company is being managed or how its finances are handled. Majority stakeholders sometimes retaliate in a way that leads to minority oppression. Sometimes, they may attempt to constrain a perceived threat or accusations by minority owners by denying the minority owner his or her rights.
Oppression of minority rights can also occur in a family run business. Conflicts between siblings or other family members that begin outside the company can end up plaguing the family business.
In other cases, minority shareholder oppression occurs because the company’s directors, managers, or majority shareholders truly have something to hide. The resulting efforts to cover up the embarrassing information can involve the violation of the minority owner’s rights.
Examples of Minority Owner Oppression
There are many ways a minority owner might be abused. In fact, many of them are not readily apparent. You might not discover carefully veiled oppressive actions until the damage becomes irreparable.
Some of the most common ways that minority oppression can occur are as follows.
Dilution of Voting Rights or Ownership
The owners who control a company sometimes try to dilute the ownership of minority members or shareholders. This can take several forms.
Sometimes it happens through a change in the governing documents, such as the bylaws or operating agreement. These changes might involve the issuance of new shares or altered voting rules.
Sometimes companies will allocate profits and losses in ways that are most beneficial to those in control. These changes might show up on tax returns sent to minority owners, such as Form K-1s – and they sometimes result in unfair tax implications for the minority owners.
Unreasonable Transfer Restrictions
Shares of stock in closely held businesses are usually illiquid, and they are hardly ever traded on the open market. With few exceptions, they have no established market value. As a result, a minority owner usually cannot escape a bad situation by selling their shares for a fair value.
Even when there is a market for shares, companies may restrain minority owners from selling their interest. The law allows companies to impose reasonable restrictions on the sale or transfer of stock or membership interests. However, some restrictions may be unreasonable to the point that they constitute oppression.
In some cases, the company or its controlling ownership might require a minority owner to provide them a right of first refusal before selling. Often, this transfer value is fixed at an amount far less than actual value. Under some circumstances, this can be cause for an oppression action.
Denial of access to records
One of the fundamental rights of all shareholders is reasonable access to financial records, such as profit and loss statements and balance sheets. Denying a minority owner access to such books and records can constitute minority oppression.
Businesses often allow employees to purchase stock through employee stock ownership programs, also called “ESOPs,” or offer shares as a part of the employee’s overall compensation package. Other times, a minority owner will invest in a business with the expectation of working for the venture. Later, the company terminates the minority shareholder’s employment.
These scenarios, sometimes called a “squeeze play” or “squeeze-out,” can amount to oppression.
Withholding Dividend Payments
Companies may refuse to declare or pay dividends to a minority shareholder. Sometimes, the controlling owners instead divert the company’s income to themselves.
In one example of a successful oppression lawsuit, majority shareholders were found to have diverted profits—and thus, potential dividend proceeds—into inflated compensation for themselves as “employees.” Then they claimed that the business had no proceeds from which to pay dividends. Given the facts of this particular case, the court found the conduct oppressive.
These examples are not exhaustive. Misuse of company funds, mismanagement, and the violation of company bylaws and operating agreements can all fall within a pattern of oppression. There are as many ways to abuse the rights of minority owners as there are greedy controlling owners.
An attorney who has experience in the oppression of minority owners can advise you if your experience could be the basis for a valid legal action. Your attorney can also explain the potential remedies available to you.
Every potential oppressed minority action must stand on its own merits. An experienced shareholder rights lawyer can analyze the details of your case to determine its viability.
In Michigan, an action alleging shareholder oppression may be brought under MCL450.1489.
To prove shareholder oppression under MCL 450.1489, a shareholder needs “to establish that the acts of the directors or those in control of the corporation are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder.”
Willfully unfair and oppressive conduct is further defined as “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder.” This may include acts such as:
- Failing to pay dividends where there is a history of dividend payments;
- Paying unreasonable or excessive compensation to majority stockholders;
- Withholding financial or other pertinent information;
- Terminating employment or reducing compensation of a minority shareholder;
- Amending formation documents;
- Self-dealing; and
- Other actions intended to “freeze-out” the minority shareholder.
Whether the majority’s actions rise to the level of oppressive conduct depends on the facts and circumstances of each case.
On September 24, 2019, the Michigan Court of Appeals issued a decision in Franks v. Franks, which provided additional details on how courts should address shareholder oppression claims.
Both the plaintiffs and defendants in Franks held shares in a company called Burr Oak Tool. They were also descendants of the company’s founder, Newell. For over 50 years, the company paid dividends to its shareholders nearly every year. However, after Newell passed away in 2007, the managing shareholders stopped paying dividends.
Burr Oak was considering a buyback of stock from the minority shareholders and had the shares professionally evaluated in 2012. An accountant valued the shares at $598 each. However, knowing that there was no market for the shares, particularly given that the company wasn’t paying dividends, the managing shareholders offered to purchase minority shares for just $62 each. They eventually increased the offer to $248 per share.
The minority shareholders did not accept any of the offers. Instead, they sued the managing shareholders for shareholder oppression under MCL 450.1489. They asked the court to force Burr Oak to buy their shares for fair value. They also alleged that the managing shareholders had breached their fiduciary duties.
The managing shareholders defended their decision not to pay dividends on the basis of the business judgment rule. This rule prohibits courts from second-guessing decisions made by a company’s managers if legitimate business reasons support the decisions. The defendants argued that they needed to keep excess funds to pay for capital improvements, redeem stock, and pay off debt. They also argued that an offer to purchase stock at a particular price is not oppressive and that their $248 offer was fair.
On appeal, the Michigan Court of Appeals clarified two specific standards courts should use to evaluate shareholder oppression claims under Michigan law:
- Whether managing shareholders have oppressed minority shareholders depends on the managing shareholders’ intent; and
- The business judgment rule will not shield managing shareholders if there is proof that they intended to oppress the minority shareholders.
Having clarified these standards, the court of appeals sent the case back to the district court for additional proceedings.
This ruling is both good news and bad news for those pursuing shareholder oppression claims. On the one hand, it increases the amount of evidence we need to show the managing shareholders’ intent. It is not enough to just show that their actions hurt minority shareholders. We need evidence of the managers’ wrongful intentions. This may include emails, testimony about conversations that occurred, or circumstantial evidence.
On the other hand, the Franks ruling prevents corrupt managers from hiding behind the business judgment rule. Even if the managers can point to a legitimate business reason that might support their action, a shareholder oppression claim can still succeed. Your attorney will help you gather evidence to show that the managers’ true intention was to oppress the minority shareholders.
If you believe you are a victim of shareholder oppression, or if you or your business has been accused of oppressive conduct, a knowledgeable attorney can help you determine how to proceed.
Generally, minority shareholders who believe they have been oppressed can seek equitable or monetary relief.
Monetary relief is just that: money for the oppressed shareholder.
Equitable relief may require the company to take a specific action, such as reinstating employment, providing access to meetings or records, or requiring majority shareholders to cease specific oppressive actions. Often, the ultimate relief involves having the controlling owners buy the oppressed minority owner out of his or her interest in the company at a fair price.
Oppressed minority shareholders may also pursue a shareholder derivative action, in which their legal claim is made on behalf of the corporation itself. In a derivative action, the shareholder seeks relief for the company’s benefit rather than their own. This might be appropriate if the controlling owners have hurt the company as a whole through their conduct.
The law imposes serious time limits on minority owners to bring claims for oppression. These are called statutes of limitation. Statutes of limitation vary from state to state and are highly fact-dependent.
Due to the complex nature of these legal matters, talking to a shareholder rights attorney is the best way to ensure you preserve your right to pursue your claim.
To learn more about your rights as a minority shareholder and your options for pursuing legal action, contact Miller Law.
Our corporate litigators understand this complex aspect of the law. We act quickly and aggressively to seek relief on your behalf and protect you from harm as much as possible.
Since 1996, Miller Law has fought passionately for the rights of shareholders against corporate takeovers, abusive proxy fight tactics, changes in corporate governance, and minority oppression.
If you suspect that your rights as a minority business owner have been violated or believe you have been oppressed, it is important to act quickly to protect your interests. Contact us today to schedule a consultation with one of our experienced shareholder rights attorneys.