Corporate shareholder oppression is when the majority of the shareholders in a company take advantage of minority shareholders in a way that unfairly prejudices them.
This arises when minority shareholders are in a position where they cannot sell their stock or gain any power in a corporation, which puts them in a perilous position financially. The manipulative techniques committed by the majority shareholders make them liable for the harm they cause to minority shareholders as a result of their decisions.
One of the difficulties with this area of law is that it is based on prior case law since each company has their own shareholder agreements. And given that companies can decide for themselves how they will pay out dividends, or if they will pay out dividends at all, there’s no specific set of behaviors that always correlate with shareholder oppression. Let’s look at an example: dividends are paid out when a company’s profits exceed the value of their stock, creating a surplus that can be distributed among shareholders.
The board of directors decides how much of the profits are shared among shareholders in the form of dividends, and how much is retained in the company. While there are legitimate reasons to retain earnings, such as reinvesting them back into the company to improve products, other times they can be intentionally withheld from shareholders.
Increase in Corporate Oppression
The potential for shareholder oppression almost certainly increased when corporate law rules changed to eliminate the common law right of minority shareholders to veto basic corporate changes like mergers (see: Heglar, Robert B. (1989), Rejecting the Minority Discount, 1989, Duke L.J., p. 258.)
The ability of shareholders to use the minority’s investment without the need to pay for it increased also with the business judgment rule and the idea of majority rule (see: Spratlin, Arthur D. Jr. (1990), Modern Remedies for Oppression in the Closely Held Corporation, 60, Miss. L.J., p. 405).
It has also been suggested by some academics and jurists that it is difficult to determine how to deal with the rights of the minority shareholder without destroying the corporation itself, but while also respecting the rights of the majority shareholder.
There are oppression remedies available for the allegedly oppressed minority shareholder. An oppressed minority shareholder can, for instance, have a court-order share purchase or they can ask the court to dissolve the corporation or to hold the corporation’s leaders accountable for their fiduciary responsibilities. (see: Thompson, Robert B. (1992–1993), Shareholder’s Cause of Action for Oppression, The, 48, Bus. Law., p. 699)
When You Need A Corporate Oppression Litigation Lawyer
Shareholders, also known as stockholders, have a right to share proportionally in the profits of the corporation in which they own shares of. Sometimes minority shareholders are also employees of a corporation. Those who commit shareholder oppression use their knowledge to make a situation seem as fair and legal as possible to avoid a lawsuit, which is why attorneys have to rely on prior cases.
It is important to use an experienced attorney who has handled minority oppression issues. (see: our website for more information about such corporate law issues.)
Types Of Corporate Oppression
There are many examples of shareholder oppression that your attorney can help you with. Some examples include:
- When minority shareholders are excluded or prevented from being part of management decisions.
- When minority shareholders are not paid dividends, in spite of there being money for dividends to be paid out.
- Intentionally withholding corporate profits from minority shareholders.
- Intentionally withholding corporate records from minority shareholders.
- Diverting funds from the corporation to outside entities
- Mismanaging the corporation in a way that harms the interest of the corporation as well as the shareholders
- Wrongfully terminating a shareholder’s employment with the corporation
- Actions that block a minority shareholder from being able to exercise their shareholder rights
Before Signing A Shareholder Agreement
Before you accept an agreement as a minority shareholder, you may want to speak with an attorney who will be able to explain to you the current laws since they have changed within the last few years.
In 2014 the Texas Supreme Court decided that corporate directors did not engage in shareholder oppression in Ritchie v. Rupe under Texas Business Corporation Act Ann. Art. 7.05 (which was recodified as Texas Business Organizations Code Ann. § 11.404).
This decision changed how corporate law is practiced, and set a new precedent for future cases. The best thing to do when you think you are a victim of shareholder oppression is to call an experienced and aggressive attorney right away.
Wade McClure is a Dallas-based trial lawyer that specializes in complex commercial litigation, including business break-up or business divorce cases, minority shareholder oppression cases,real estate investment disputes and other investment fraud and fiduciary duty litigation.