Shareholder Oppression

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Shareholder Oppression

Shareholder oppression occurs when a shareholder or a group of aligned shareholders who own a majority of a companies shares, and therefore control a company, use their control to operate the company for their advantage at the expense of minority shareholders. Likewise, the same can be true for members of an LLC.

 

The typical closely held corporation is owned by only a small number of shareholders who are locked into their investment because there is no public securities market to trade shares of the corporation’s stock. Noncontrolling shares are unlikely to attract interest from private investors and corporate governance documents frequently preclude or restrict a transfer of shares. This leaves minority shareholders in a vulnerable position with no means of exit if they are treated unfairly.

 

Squeeze Out, Freeze Out & Washout

A “squeeze out” or “freeze out” occurs when the majority shareholders use their strategic position and power within the company to force out minority shareholders. For instance, the majority shareholder may force them to sell their shares to the company at an unreasonably low price, or resorting to remain shareholders but not receive any benefit of ownership.

 

“Squeeze outs” and “freeze outs” can also occur when a company is merged with another corporation controlled by the majority shareholder, and the terms of the merger force the minority shareholder to redeem their shares at an unreasonably low value.¬†Unjustified termination of a minority shareholders employment or benefits is a common form of “squeeze out.”

 

“Washouts” occur when the majority shareholders undergo a financial restructuring of the company that significantly dilutes a minority shareholders holdings to the point of being worthless.

 

Right To Information

Shareholders of a corporation and members of an LLC have the right to access company financial information and records including:

 

  • Documents relating to any proposed buy-out of shareholder’s interest
  • Balance Sheets, statements of income, and application of funds
  • Financial statements, whether audited or unaudited
  • Tax returns
  • Appraisals or valuations of the company or its assets
  • Statements of any bank or brokerage account
  • Statements of accounts receivable

 

Other Potential Examples Of Oppression

  • Actions that prevent a minority shareholder from exercising typical shareholder rights
  • Diverting corporate funds to outside companies
  • Misappropriating corporate opportunities and reducing value of minority shareholding interest
  • Hiding corporate profits from minority shareholders
  • Mismanagement of the corporation resulting in harm both to the corporation and the interests of shareholders
  • Depriving minority shareholders from receiving benefits of ownership
  • Refusing to pay dividends to a minority shareholder, despite the existence of cash reserves in the corporation
  • Preventing shareholder from participating in corporate decisions
  • Improper termination of minority shareholders employment
  • Improperly withholding dividends
  • Majority shareholders paying themselves excessive salaries, bonuses or benefits
  • Withholding corporate records
  • Denying minority shareholders access to company premises and restricting access to company employees
  • Excluding minority shareholders from participation in management decisions

 

With decades of experience, The Miller Law Firm delivers hands-on litigation and dispute resolution services. Through our in-house¬†e-Discovery and document management services, we are able to reduce costs associated with litigation, increase productivity, and adapt to our clients’ specific needs. When working on a case, we consider all the issues surrounding your business to maximize the odds of delivering the best possible results.