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.
For instance: 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.
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 vital to hire an experienced attorney.
Visit our website to learn more about how a corporate lawyer can assist with cases of oppression, breach of fiduciary duty and other areas of oppressive conduct in corporate affairs.
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 – ‘the BOC’).
Although the fiduciary duties of corporate directors and company officers are not included in the BOC, Texas law has made it very clear that directors and officers owe specific duties to individual shareholders, including those of care and loyalty. The same duties also apply to LLC manager and officers.
In the Ritchie case there was keen attention paid to whether minority shareholders had a legal right to obtain a buyout of their interests based on their claims that ‘control persons’ were engaged in shareholder oppression. The Court held no claim for shareholder oppression exists in the BOC or at common law that would permit a trial court to order the company or majority owners to buy the minority owner’s stake in the business. However what was important in the case of shareholder opporession and what was held in the Ritchie Court was the right of minority shareholders to pursue claims against officers and directors for breach of their fiduciary duties, and recognized that these claims could be brought on a derivative basis.
The Court found –
“Directors, or those acting as directors, owe a fiduciary duty to the corporation in their directorial actions,and this duty “includes the dedication of [their] uncorrupted business judgment for the sole benefit of the corporation.”Ritchie decision – 443 S.W.3d at 868.
This decision changed how corporate law is practiced, and set a new precedent for future cases.
Majority owners need to be fully transparent in their dealings with the company and wherever possible they should seek agreement with other owners. If no such agreement is possible, they need to obtain specific advice from outside experts who can validate the fairness of the transaction to the company before it takes place.
And expert legal representation in the case(s) of shareholder oppression is always fundamental. The requirement for careful and diligent legal representation in cases of shareholder oppression has never been more important.
Source: Wade McClure, Dallas, TX