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