Minority shareholders are those who hold less than 51% of the shares in a corporation. Both publicly traded and privately held companies have shareholders. However, the rights of minority shareholders in closely held corporations may be more subject to oppression than those of shareholders in public companies.
This is because you can’t sell shares in a private company on the open market in the same way that you can sell shares of a public company.
On the other hand, shareholders in a private company have other benefits, such as getting a minority discount if the company later goes public or is sold. They may also have a greater opportunity to participate in the operation of the business.
If you want to protect your minority shareholder rights or if you are considering investing in a closely held corporation, it’s wise to have an experienced shareholder rights attorney on your side.
All shareholders generally have at least the following rights:
- Right to vote on major decisions and election of directors;
- Right to participate in meetings;
- Right to receive dividends; and
- Right to inspect company records that are relevant to the shareholder’s interests.
Furthermore, directors and majority shareholders owe a fiduciary duty to the corporation and its minority shareholders to act in the interests of the company. They must avoid self-dealing and act in compliance with the law and the corporation’s governing documents. Majority shareholders may breach their fiduciary duties by:
- Breaching contracts governing the operation of the corporation;
- Voting unreasonable compensation for themselves;
- Making loans to the company with high interest rates;
- Using corporate funds for the personal benefit of majority shareholders; or
- Making corporate decisions that personally benefit majority shareholders.
If a majority shareholder violates your minority shareholder rights or breaches their fiduciary duty, you may be entitled to legal remedies.
When you invest in a company, it is important that you understand what you are getting into. Most often, your rights as a shareholder will be governed by a shareholder agreement. A shareholder rights lawyer can help you review the shareholder agreement and make sure that it adequately protects your interests. Pay special attention to provisions regarding:
- What issues you have the right to vote on;
- How directors and officers are elected or appointed;
- Restrictions on your right to participate in a competing business;
- Your right to purchase new shares that the company issues in the future;
- How and to whom your shares may be sold;
- How shares will be valued;
- Circumstances that may trigger a right for majority shareholders to buy out your shares;
- How many total shares there are, who owns them, and what percentage other shareholders own; and
- Substantive rules regarding the operation of the business.
By paying close attention to the shareholder agreement and reviewing it with an attorney before investing, you can proactively protect your minority shareholder rights.
There are a number of ways a majority shareholder may remove a minority shareholder, and doing so is not necessarily wrong. For example, the majority shareholder may buy out the minority shareholder’s shares, either by following the terms of the shareholder agreement or by negotiating with the shareholder.
There are even steps a majority shareholder can take to legally pressure a minority shareholder to sell their shares. For example, they may remove the shareholder from the board of directors, terminate their employment, or prevent the company from doing business with them, so long as these actions do not violate the shareholder agreement.
However, if the majority shareholder engages in oppressive tactics to freeze out a minority shareholder, they may be held accountable. Examples include:
- Refusing to pay dividends;
- Treating majority shareholders more favorably than minority shareholders;
- Preventing minority shareholders from exercising their rights to vote or participate in meetings;
- Breaching provisions of the shareholder agreement;
- Restricting access to records; and
- Terminating employment or limiting employment benefits in a way that disproportionately affects the shareholder’s interests as compared to other shareholders.
Michigan provides remedies for the oppression of minority shareholders.
In Michigan, a minority shareholder may bring an action against majority shareholders or directors for actions that are:
- Illegal, or
- Willfully unfair and oppressive to the minority shareholder or the corporation.
If a minority shareholder prevails on an oppression claim, the court may provide remedies such as:
- Dissolving the business and/or liquidating assets;
- Revising or canceling provisions of the corporation’s bylaws, articles of incorporation, or other agreements;
- Ordering majority shareholders to take certain actions;
- Issuing an injunction to prevent majority shareholders from moving forward with harmful actions;
- Ordering majority shareholders to purchase minority shares for fair value; and/or
- Awarding damages.
A shareholder rights attorney can help you determine what remedies you are likely to obtain in your minority shareholder oppression action.
How Long Do You Have to File an Oppression Action in Michigan?
A minority shareholder action for oppressive conduct must be brought within three years of the events giving rise to the cause of action. If the minority shareholder did not learn and could not reasonably have known of the facts underlying the claim at the time it occurred, they will have two years from the time of discovery to file.
A shareholder rights attorney can help you preserve and protect your rights both before and after you invest in a private company. The Miller Law Firm, P.C., is Michigan’s leader in shareholder rights. Our attorneys have recovered over $2 billion in shareholder rights cases, including seven-figure settlements in numerous cases. We offer a free initial consultation, so call us today or message us online to learn how we can help you protect your minority shareholder rights.