Shareholder Oppression

Shareholder Oppression Explained | Illinois Minority Shareholder Rights

Updated on:
March 12, 2019

In this article, we explain shareholder oppression in Illinois.  We answer the questions, “What is shareholder oppression?” and “what types of actions qualify as shareholder oppression?” We also explain the elements of a shareholder oppression claim, remedies for shareholder oppression, and how to protect your rights as a minority shareholder.

What is Shareholder Oppression?

Shareholder Oppression occurs when majority shareholders of a corporation overpower or unfairly prejudice the minority shareholders. Courts define shareholder oppression as violating the “reasonable expectations” of minority shareholders.

What Types of Actions Qualify as Shareholder Oppression?

The oppressors may attempt to “push out” a stockholder, forcing him or her to leave the corporation and sell his or her shares at an unfairly low price, or they may attempt to “freeze out” the stockholder, rendering the minority shareholder’s ownership irrelevant by structuring corporate governance and distribution inadequately.

For example, the majority shareholders could manipulate the finances of the corporation to ensure that profits are not distributed as dividends, but diverted to the majority. It’s also common for majority shareholders to cut off information and participation in management from the minority shareholders. A few other examples of shareholder oppression include but are not limited to:

·      Physically locking a minority shareholder out of corporate premises

·      Denying company information or the chance to inspect corporate records

·      Attempting to deprive stock ownership

·      Attempting to purchase minority shares at an unfair price

·      Implementing an unfair stock redemption plan that favors majority shareholders

·      Accepting a cash merger that cuts minority shareholders out of the deal

·      Terminating a minority shareholder’s employment

·      Failing to notify minority shareholders of shareholder meetings

·      Attempting to change minority shareholders terms

·      Altering corporate books

·      Preventing minority shareholders from protecting themselves from dilution of their equity

·      Paying personal expenses of other shareholders or related parties with corporate funds

Elements of a Shareholder Oppression Claim

If any of these actions have happened to you as a minority shareholder, you may have a valid claim of shareholder oppression. Shareholder oppression is not only unethical, but also illegal. Most instances of shareholder oppression occur in small, closely held corporations, because the lack of a public market for shares leaves minority shareholders particularly vulnerable, as they cannot avoid mistreatment by selling their stock and exiting the corporation. Minority shareholders in these corporations cannot elect officers or directors to protect their interests. They also cannot win any vote submitted to the shareholders. Minority shareholders are very limited to the amount of influence that the majority permits.

If the majority shareholders harm the economic interests of the minority, the minority shareholders may have a claim against the corporation and file a lawsuit for rightful compensation. Any majority shareholder behavior that insinuates “acts of willful breach of fiduciary duty” may lead to liability.

Ultimately, courts look for the following points:

·      The majority shareholders’ actions and behavior defeat the minority’s reasonable expectations, which were central to the minority shareholder’s decision to invest and join the venture in the first place;

·      The majority shareholders engage in burdensome, harsh, or wrongful conduct, showing a lack of fairness in company affairs to the prejudice of only minority members.

Remedies for Shareholder Oppression

For business situations that do not include a shareholders’ agreement, minority shareholders who lack both contractual rights and voting power do not have any control over how disputes are resolved. Oppressed minority shareholders can ask the court to dissolve the corporation or to hold the corporation’s leaders accountable for their fiduciary responsibilities.

How to Protect Your Rights as a Minority Shareholder

The best way to protect yourself from shareholder oppression is to only enter into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect mutual expectations and agreements. All shareholder agreements should define respective management and voting powers, the apportionment of losses and profits, the payment of dividends, and shareholders’ rights to buy or sell shares from or to each other, the corporation, or an outside party. Many smaller corporations have shareholders that are family members or close friends who trust one another, so they don’t believe contractual protection in necessary.

Shareholder oppression claims are available to minority shareholders who believe they are victims of abuse from majority shareholders of a corporation. Due to limited power, the only recourse for an oppressed minority shareholder is judicial relief in a shareholder oppression or breach of fiduciary duty suit. Even then, there still isn’t a standard “oppression” definition. Oppression claims are based on state law, meaning the statutory definition for Illinois may be different than Indiana.

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Disclaimer: Our articles and comment responses do not constitute legal advice and are not intended to create an attorney-client relationship.

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Minority shareholders rightsWhat Types of Actions Qualify as Shareholder Oppression?Elements of a Shareholder Oppression ClaimRemedies for Shareholder OppressionHow to Protect Your Rights as a Minority Shareholder

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