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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.
In this article, our business attorneys 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.
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, 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?
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 cannot easily sell off their shares for a profit. Majority shareholders can 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. Still, suppose they are denied access to these records. In that case, 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 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 between the shareholders and the companies they own. To avoid minority oppression, you must ensure your shareholder’s 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. The ability to appoint directors acting in the company’s financial interest is usually a sign of unity between shareholders and the company you buy from.
- Tag/Drag-Along Protections. These rights ensure 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 terms of the same sale as majority shareholders. Drag-Along states that if the majority of shareholders agree to a sale, 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 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
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:
- The directors are deadlocked in the management of corporate affairs, and the shareholders are unable to break the deadlock;
- The shareholders are deadlocked and have failed for at least two annual meetings to elect successors to directors whose terms have expired;
- Those in control of the corporation are acting in a manner that is illegal, oppressive, or fraudulent;
- 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 enforce if a conflict should arise legally. 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 shareholders 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.