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Right Of Minority Shareholders In Small Companies

Majority and minority shareholders participating in shareholder meeting

When someone buys stock in a company, that person becomes a shareholder, a part owner. How much of an owner depends on the number of shares. An investor who is designated as a minority shareholder holds less than 51% of the shares in the corporation. With those shares come rights that pertain to the direction and finances of the company. When those rights are infringed upon, a minority shareholder may be able to seek a remedy. The business attorneys at Schwab & Gasparini provide supportive information about the rights of minority shareholders. If you have questions about the remedies available in your situation, consider calling one of the New York offices: Syracuse (315) 422-1333, Albany (518) 591-4664, and White Plains and Hudson Valley (914) 304-4353.

The Rights of Minority Shareholders

All New York state corporations must comply with the business corporation regulations, according to the The New York State Senate. Those regulations cover the rights of minority shareholders, including the following fundamental rights:

The Right To Vote on Company Action and Participate in Management

Many day-to-day operational decisions are made in a company that do not involve minority shareholders. The involvement is different for the bigger decisions. Minority shareholders can vote on significant matters like electing the board of directors, approving mergers, and amending the certificate of incorporation.

The Right To Inspect Books and Records

Minority shareholders in corporations have the right to inspect the books and specific records of the corporation. Those company records include the following:

  • Annual balance sheets
  • Income statements
  • Record of shareholders meetings
  • Tax returns
  • Account books
  • Records of subsidiaries

In order to review the corporation’s records, the minority shareholders need to demonstrate that they have a “proper purpose,” which for corporate governance purposes is defined as a legitimate purpose to protect the company’s best interest.

The Right To Purchase Shares To Avoid Dilution

Before 1997, corporations could grant minority shareholders the right to purchase additional shares to prevent dilution. Those laws were revised in 1997. With the new regulations, the company’s certificate of incorporation outlines the specific preemptive rights to purchase shares. In other words, unless those rights are part of the operating agreement, minority shareholders cannot engage in those transactions.

The Right To Prosecute Derivative Actions

Sometimes, a situation can arise that requires minority shareholders to pursue legal actions on behalf of the company if the board of directors refuses to take action. This type of action can mean that the minority shareholders will file a lawsuit against the majority shareholders. Derivative actions may involve allegations of management waste, misuse of company funds, or breach of fiduciary duty.

The Right To Petition for Involuntary Dissolution

There are several circumstances in which a minority shareholder can petition for involuntary dissolution of a corporation, according to the New York State Bar. This may happen when the directors are deadlocked over taking action or the shareholders are deadlocked over impeding director elections. The right to override the deadlock by petitioning for dissolution matters is especially significant because directors or others in control could engage in illegal, fraudulent, or oppressive actions toward complaining shareholders.

Another scenario in which a dissolution petition could be necessary is when corporate assets are being misused for non-corporate purposes. However, a minority shareholder possessing less than 20 percent of the voting shares must resort to common law when seeking dissolution. A business attorney from Schwab & Gasparini may be able to provide minority shareholders with assistance in determining whether the exact type of situation calls for a petition for involuntary dissolution.

Minority Shareholder Oppression

Despite their limited power, minority shareholders do retain certain rights. Any violation of those rights can be considered shareholder oppression, which may warrant legal action.

For shareholder oppression to be actionable, the conduct must involve fraudulence, unfairness, or illegitimacy. In other words, minority shareholders cannot claim oppression if they merely have a disagreement or if they are outvoted on a particular issue. An oppression claim may be actionable if there is clear evidence that the minority shareholders’ rights have been compromised. This type of action could fall under one of the following categories:

Income Diversion

Did the majority owners redirect the company’s net profits to their own advantage? By doing this, did they cause a disadvantage to the minority owners through potentially fraudulent or illegitimate means? The need to answer these questions on the basis of information that is clear, accurate, and complete forms one of the reasons why it is so crucial for minority shareholders to have access to the company’s financial records.

Share Dilution

In a scenario where the majority shareholders in a company attempt to make a so-called “power grab,” they would do so by enacting bylaws that diminish the voting power of the minority shareholders. This can create a situation in which there exists a power imbalance due to the majority owners granting themselves increased leverage.

Denial of Access

Minority owners may be unjustly denied access to company books or records. They could also be restricted from participating in official meetings. These actions would impede the minority shareholders’ ability to stay informed in company matters. Denial of access is often referred to as “freezing out,” and it is one of the more common forms of corporate oppression.

Employment Issues

In smaller companies where shareholders often serve as employees, the majority may vote to terminate a minority owner’s employment. That action would essentially strip the employee of his or her access to company property and records. The employee may consider a situation like this to be an issue of unfair termination.

Withholding Dividends

Majority owners may decide to retain company profits instead of distributing dividends. That can cause financial strain on the minority shareholders who heavily rely on dividends as a substantial portion of their income.

Seek Minority Shareholder Support Today

When an issue of minority shareholder oppression is raised, the first question is whether the majority owners are within their rights to take the action in question. The answer to that will usually be found in the corporation agreement. However, these agreements can be difficult to decipher. If you have questions about the rights of minority shareholders, consider contacting an experienced business attorney from Schwab & Gasparini. Schedule a consultation at one of the firm’s convenient New York offices by calling (315) 422-1333 in Syracuse, (518) 591-4664 in Albany, or (914) 304-4353 in White Plains and Hudson Valley. Minority shareholders’ rights are only valuable when they are put into action.

Sun Mar 10 2024, 12:00am