Shareholder oppression is a serious business challenge. When this occurs, the majority of shareholders act in a way that is biased against the minority. For instance, they might work towards a squeeze-out or refuse dividends. In some instances, the majority locks the minority from the corporate headquarters. They could also refuse to allow minority stockholders to look at business records.
Shareholder oppression can result in legal ramifications. Therefore, it’s important to know when oppression occurs and to understand the legal consequences.
When Does Shareholder Oppression Usually Occur?
Shareholder oppression is most common in close corporations. Because they don’t have public market shares, minority stockholders can’t easily sell their shares.
That said, shareholder oppression can occur in many different scenarios. Any time there are minority and majority shareholders, the potential for oppression is there.
A shareholder has the right to have reasonable expectations of the majority. When the majority fails to meet those expectations, the minority can take legal action. This doesn’t need to involve monetary issues. In some instances, the issue is not related to money at all. If you believe you may be a victim of shareholder oppression, you should speak with an attorney. They can tell you whether or not you have a case.
Examples of Minority Oppression
To fully understand shareholder oppression, you should consider some examples. The majority shareholders of a company could refuse to pay dividends. Although the business has the financial means to pay, they don’t. This upsets several of the minority shareholders.
Another example involves the use of corporate funds. Those in power decide to pay for personal expenses of the majority shareholders. However, the minority shareholders are affected by the arrangement and don’t benefit. Although one minority shareholder complains, the company does nothing. In this case, the shareholder could work with an attorney to remedy the situation.
The Consequences of Shareholder Oppression
If someone feels as if the majority of shareholders are being prejudiced, they can take the issue to the courtroom. They could go to court and ask a judge to dissolve the corporation.
However, the process isn’t easy. The shareholder needs to sue the corporation and request that it is dissolved. For this lawsuit to be successful, there needs to be evidence that the directors or other controlling parties did one or more of the following:
- Behaved in an illegal or fraudulent manner
- Oppressed or behaved unfairly towards one or more shareholders
- Are guilty of mismanagement
- Abused their power
The court analyzes the amount of control possessed by the shareholder. Instead of looking at the number of shares owned by each shareholder, they consider who has control over the corporation. For instance, one shareholder’s stock could be held in a voting trust. If someone else controls that trust, the shareholder is a minority shareholder.
What is the Outcome?
Not all lawsuits regarding shareholder oppression are in favor of the minority shareholder. At times, the majority can defend the lawsuit. For instance, they could claim the minority shareholder was involved in illegal corporate actions.
The defense of the lawsuit depends on the circumstances. When a lawsuit is centered around the mismanagement of a corporation, the majority may be able to justify their decisions.
After hearing the case, the court will issue a ruling. If they believe there is shareholder oppression, the court could appoint someone else to run the corporation until the issue is fixed. Or, they could force the stock to be sold to other shareholders or back to the company. As a final resort, the court could force the corporation to be dissolved. However, this is only the case for extreme mismanagement.
In 2018, 22 companies in the Dallas-Fort Worth area were on the Fortune 500 list. With so many corporations in the city, shareholder oppression happens more than you might imagine. If you have questions about your case, contact Wade McClure.
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