What is Oppression of Minority Shareholders? | Minority Shareholder Protections

Article written by Attorney Kevin O'Flaherty
Updated on
September 16, 2020

In this article, we answer the question “What is oppression of minority shareholders?” and “How to fight oppression of minority shareholders?” Oppression of minority shareholders occurs when a majority shareholder or a business leader denies a minority shareholder their legal rights as a shareholder.  For more on minority shareholders, see our previous article, What is a Minority Shareholder?

What are the Rights of Minority Shareholders?

A minority shareholder is someone who owns less than 50% of a company and therefore has less power and control over the company and its decisions. These minority shareholders do not have the power and sway of a majority shareholder, someone who owns over 50% of the company. However, they do have legal rights that a company must follow.  

Some of these rights include:

  • Access to record books of the company.
  • Access to shareholder meetings.
  • The right to address shareholders and directors at meetings.

For more on the rights of minority shareholders, see What is a Minority Shareholder?

What is Oppression of Minority Shareholders?

Opression of Minority Shareholders in Illinois

A minority shareholder faces oppression when they are denied their rights as a minority shareholder or when the majority is acting against the best interest of the minority. Often, this happens in smaller companies when minority shareholders are not able to easily sell off their shares for profit.  Majority shareholders are able to make business decisions regardless of the minority, often resulting in company decisions that benefit the majority shareholder, but hinder the minority.

For example, minority shareholders may request copies of record books from the company, but if they are denied access to these records, that is minority shareholder oppression because they are not being given all the information about the company’s finances.  Another example would be if a company took action to devalue the minority shareholders, such as diverting company income to the majority shareholders through pay raises, bonuses, or personal expenses rather than as dividends, which pay to all of the shareholders as a whole.

How To Prevent The Oppression of Minority Shareholders

Many elements of minority shareholder oppression are most directly and easily protected through contracts made between the shareholders and the companies they own.  Meaning, if you want to avoid minority oppression, you will need to make sure your shareholders agreement contains the protection you need.

It is recommended to seek advice from a contract attorney for specifics, but here are some of the things to look for in a shareholders agreement that will provide the strongest protection against minority shareholder oppression:

  • Right of First Refusal and Pre-Emptive Rights. These rights will help secure your percentage of ownership, even when new shares are made available or a shareholder decides to sell their shares.  This will help preserve the percentage value of your share within the company.
  • The Right to Appoint a Director or Officer. Having the ability to appoint directors, who act in the financial interest of the company, is usually a good sign of unity between shareholders and the company you are buying from.
  • Tag/Drag-Along Protections. These rights insure that, when a company is being sold, the minority shareholders are not left out.  Tag-Along states that minority shareholders will be subject to the same sales terms of majority shareholders. Drag-Along states that, if a sale is agreed to by the large majority of shareholders, 100% of the company will be sold in its entirety, even if a small percentage of shareholders do not agree to the sale.
  • Specific Issues Related to the Business.  If you foresee a certain issue that may come up for the business in the future, it is good to have it addressed in the agreement, even if it is not yet a present issue. These issues are usually specific to the industry or market your business is related to and are best found by seeking advice from a contract attorney or professional within the industry.

Legal Protections from Minority Oppression in Illinois

Protections for Minority Shareholders

Legal protections for minority shareholders are broad and dependent on the state. In Illinois, The Illinois Business Corporation Act provides twelve specific remedies that can be sought if one of four specific situations comes into play.  The four situations are as follows:

  1. The directors are deadlocked in the management of corporate affairs and the shareholders are unable to break the deadlock;
  2. The shareholders are deadlocked and have failed for at least 2 annual meetings to elect successors to directors whose terms have expired;
  3. Those in control of the corporation are acting in a manner that is illegal, oppressive, or fraudulent;
  4. The corporation’s assets are being misapplied or wasted.  

These legal proceedings are often complex, overlong and expensive, so minority shareholders should be certain that they have a strong case before proceeding.  This is why contractual protections are usually a strong option as they will be more secure and easier to legally enforce if a conflict should arise.  If you are uncertain of the terms in your shareholder agreement, it would be advised to speak to a contract attorney who will be able to ensure that you are being met with the best protections possible as a shareholder.

For more on legal protections for minority shareholder in Illinois, including the differences between closely held corporations and LLCs, see our article, Minority Shareholders Rights in Illinois Closely Held Corporations and LLCs Explained.  

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