Litigation between majority and minority shareholders can impact the health of a business and the finances of shareholders. Oftentimes, minority shareholders will feel underrepresented and powerless in these disputes. Understanding the rights and remedies that minority shareholders can use should be a priority for everyone involved in shareholder lawsuit.
What rights can minority shareholders receive?
While shareholder agreements and contracts can differ greatly, what follows are a few common rights that some minority shareholders receive:
- Preemptive rights: Preemptive rights give shareholders the ability to buy newly issued shares of a company they already own. This clause gives current shareholders the ability to protect their ownership percentage from dilution.
- Director, officer and board member voting rights: The ability to appoint a director, officer or board member lets shareholders set the direction of a business. Minority shareholders may be able to vote as part of a block to appoint a board member.
- Dividends: Dividends are a part of the company’s profit that the business pays to shareholders. This payment often takes the form of cash or additional stocks.
- Right to sue for wrongful acts: Shareholders can take legal action against the company’s board of directors if the board committed wrongful acts. This does not mean that shareholder can sue people who made good faith decisions that that ended up hurting the company. Shareholders can bring a lawsuit against board members who acted in their own self-interest at the expense of a business.
It is important to stress that minority shareholder rights can vary. Your shareholder agreement will lay out what rights you have and what the business owes you. You should speak with a knowledgeable business lawyer if you have questions about what rights granted in your shareholder agreement.
Recognizing minority shareholder oppression or abuse
If the majority shareholders abuse, mislead or otherwise harm minority shareholders, the minority party may have grounds for civil litigation.
There are many types of minority shareholder abuse, including:
- Failure to pay dividends or other forms of agreed upon monetary compensation
- Forcing the sale or dilution of the minority stockholders’ shares
- Withholding pertinent business information
- Breaches of fiduciary duty
- Fraudulent and/or illegal actions
What can minority shareholders do to protect their rights?
Most minority shareholders who are victims of oppression or abuse have a right to take legal action against the party that caused the harm. The legal strategies used to fight back against minority shareholder oppression include filing a lawsuit for a breach of contract or for a breach of fiduciary duty.
New York law gives shareholders who own at least 20 percent of a business’s voting shares the ability to file a petition of dissolution. A shareholder can only file this dissolution petition if the people in charge of the business are guilty of an illegal action and if the petition is the only feasible way that a minority stakeholder can receive a fair return on their investment.
Minority shareholder abuse can occur in businesses of any size and at any point in a business’s life cycle. You should speak with a business attorney if you believe that you have experienced minority shareholder oppression. A skilled business litigator can review your shareholder contract and start the process of protecting your rights.