Owning and operating a closely held corporation can become contentious when you don’t have equal shares and an equal say. When a few owners have a majority of shares and call the shots, their actions may not benefit you.
Sometimes, their actions rise to the level of shareholder oppression.
What Is Shareholder Oppression?
Shareholder oppression is conduct by the majority shareholders that is unfair to minority shareholders’ interests. Oppression arises because shareholders don’t have equal rights.
Some stockholders may hold more shares than others, allowing them to exert more control over the business. This type of oppression of minority shareholders most often happens in private, closely-held corporations.
These are businesses formed by just a few people.
If you go by the Internal Revenue Service (IRS) definition, a closely held corporation is one in which five or fewer individuals own more than 50% of the outstanding stock at any time during the last half of the tax year. In order to qualify, the company must not be a personal services corporation.
What Is Minority Shareholder Oppression?
Minority shareholders are those who own fewer than 50% of the company’s voting shares. The majority shareholders own more than 50% of the company and often end up controlling the direction of the business and dictating the outcome of any disputes that may arise.
In this way, minority shareholders end up with very little say in the business. Furthermore, they usually have few options to remove themselves from the situation.
Because most shareholder oppression occurs in closely held corporations, minority shareholders can’t easily sell their shares and move on. As a result, they are often stuck with their investment.
Examples of Shareholder Oppression
Shareholder oppression can take on many forms. Oppression of the minority shareholders can happen when majority shareholders:
- Vote in their own best interests, ignoring the interests of minority stockholders;
- Exclude minority shareholders from important financial and management discussions and decisions, effectively freezing them out of company management;
- Fail to provide adequate corporation records to minority shareholders;
- Use tactics to force minority shareholders to sell their shares to the majority for less than the shares are worth—also known as “squeezing out;”
- Block minority shareholders from business premises;
- Use their position to dilute minority ownership;
- Use their power to fundamentally change the nature or structure of the business from what minority shareholders initially agreed to; and
- Refuse to pay dividends.
If you believe the majority shareholders in your company are treating you and other minority shareholders unfairly, talk with a Dallas business litigation attorney.
What Are Minority Shareholders’ Rights?
In Ritchie v. Rupe, the Texas Supreme Court noted that when there is no shareholders’ agreement, minority shareholders lack contractual rights regarding the business and voting power. The minority shareholders also lack any statutory rights to demand equal say.
Without a contract, minority shareholders have limited rights and are at risk of abuse by majority shareholders.
Can I Sue for Minority Shareholder Oppression?
Before 2014, minority shareholders could force the majority shareholders to buy them out for a fair amount. This option gave minority owners a way out of a bad situation. Ritchie v. Rupe changed that.
In Ritchie v. Rupe, a fourth shareholder who owned 18% of the company tried to sell her shares to the other three shareholders. They refused. Next, Rupe tried to sell her shares to a third party, but the majority shareholders wouldn’t cooperate again.
Rupe sued, and the trial and appeals courts ruled in her favor. However, the Supreme Court of Texas ruled state law didn’t recognize a court-ordered buyout. The court limited minority shareholders’ remedies when dealing with shareholder oppression in Texas by deciding shareholder oppression is not a basis for filing a lawsuit.
Because of this case, minority shareholders can’t hold majority shareholders responsible for oppression unless the conduct harms the corporation.
Are There Remedies for Shareholder Oppression in Texas?
Minority shareholders may have the right to file a derivative lawsuit. This is a case brought on behalf of the corporation to enforce the corporation’s rights when the business leaders won’t.
In response to shareholder oppression, minority shareholders can file a derivative lawsuit based on a breach of fiduciary duty. Instead of alleging the business leadership harmed minority shareholders, they argue the leadership has damaged the business.
Call for Help Today
If you believe the majority shareholders are oppressing you and other minority shareholders, contact a Dallas business litigation attorney at The Hunnicutt Law Group online or at 214-361-6740. Our attorneys will carefully review your situation and advise you of your legal options, such as filing a breach of fiduciary duty suit.