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 remedies for shareholder oppression, and how to protect your rights as a minority shareholder.
The Illinois Business Corporation Act provides that shareholder oppression occurs when the majority shareholders or directors of a non-public corporation act in an illegal, oppressive, or fraudulent manner with respect to a minority shareholder or if they misapply or waste a company’s assets. “Oppressive” behavior is behavior that is arbitrary, overbearing or heavy-handed. Whether a particular type of behavior qualifies as shareholder oppression is determined on a case-by-case basis.
For a definition of the term “minority shareholder,” check out our article: What is a Minority Shareholder?
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
The Illinois Business Corporation Act makes the following remedies available for claims of shareholder oppression:
Courts will only order dissolution of the corporation as a remedy for shareholder oppression if the other remedies are not sufficient.
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.
For more, check out our article: Minority Shareholder Rights Explained in Closely-Held Corporations and LLCs Explained.
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