Shareholder oppression is relatively common, particularly in closely held corporations (private companies owned by a small group of shareholders). Fortunately, several mechanisms are available to protect minority shareholder rights and stop oppressive conduct from majority shareholders.
In this article, we discuss the fundamental rights of minority shareholders in the United States and the legal protections available in case of minority shareholder oppression, including unfair treatment during mergers and acquisitions.
Who are minority shareholders?
Minority shareholders are individuals, institutional investors, and business owners who own less than 51% of shares in a corporation, private or public. The influence of minority shareholders varies depending on the size of their stake in a company and the overall size of the company itself.
Minority interests generally range between 20% and 30% of the company’s equity, compared to the majority interest of over 50%.
Investopedia
A typical minority shareholder of a small private company may hold a comparatively larger stake than a minority shareholder of a large public company. In this scenario, a private minority shareholder could potentially wield considerable influence over a small company’s decisions.
This dynamic opens the doors for shareholder oppression when majority shareholders want to limit the decision-making power of minority shareholders and so attempt to remove them from the business.
The four main rights of minority shareholders
U.S. corporate law identifies several rights of minority shareholders, including the right to fair treatment, the right to information, the right to dividends, and voting rights. However, there is no universal ‘shareholder rights law’ governing all U.S. corporations or ruling the relationships between majority and minority shareholders.
Instead, the main minority shareholder rights are outlined in state laws and federal regulations, including the Securities Exchange Act of 1934, and the Securities and Exchange Commission (SEC) regulations:
Right to fair treatment
Majority shareholders have a fiduciary duty to act in the best interests of the corporation and proactively protect the rights of minority shareholders. This right is outlined in U.S. state laws, allowing minority shareholders to sue majority stockholders if there is a breach of fiduciary duties.
Right to information
Minority shareholders have the right to inspect company records, including board meeting minutes, books and records, financial statements, tax returns, and reports. This right is specifically outlined in federal securities regulations and state laws.
Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from…the corporation’s stock ledger, a list of its stockholders, and its other books and records…
Delaware General Corporation Law
Right to vote
Minority shareholders have the right to vote on major corporate decisions, including the nomination of board members, mergers and acquisitions, amendments to governing documents, and other corporate decisions. Minority shareholder voting rights are available to holders of common shares. Preferred stockholders generally don’t have the same voting rights as holders of common stock.
Right to dividends
Minority shareholders have dividend rights and receive dividends according to the number of shares held. However, dividend distribution varies among share classes. Preferred shareholders have priority in dividend distribution. They are guaranteed fixed dividends, while holders of common shares may receive dividends when the company decides to share excess profit.
Shareholders of public companies typically discover dividend conditions (such as amounts and timing) from official public channels, including investor relations portals, and dedicated investment services. In private companies, dividend conditions are typically outlined in shareholder agreements, while dividend-related updates are communicated directly to shareholders.
How could majority shareholders oppress minority shareholders?
Shareholder oppression occurs more often in private companies, typically between co-owners in closely-held corporations. There are several reasons why the rights of minority shareholders are more frequently violated in a private company:
- Limited liquidity
In a private company, minority shareholder’s shares can’t be sold as easily as the shares of shareholders in public companies. There is no active market for private shares, making it difficult for minority shareholders to find buyers, exit their investment, and escape unfair treatment as a result.
- Power imbalance
Self-interested co-owners in a closely held corporation, who are majority shareholders, often abuse their power to undermine the interests of minority shareholders for maximizing personal profits.
- Limited oversight
Private companies have less stringent regulatory requirements than public companies, raising the opportunity to undermine shareholder voting rights.
Here are four common minority shareholder legal challenges that could occur in closely held corporations.
Withholding company records
Minority shareholders can be deprived of critical business information, including business contracts, financial records, or financial decisions. Owners may keep minority shareholders from shareholder meetings and corporate decision-making.
Withholding dividends
Majority shareholders may deliberately choose not to pay dividends while simultaneously using company profits for personal benefit. They may allocate corporate funds to themselves in the form of unreasonable compensation or divert investment into other businesses they own.
The easiest way for majority shareholders to deny dividends is to give minority shareholders little corporate information to conceal personal gain. It’s common for an oppressor to abuse bureaucracy, making it harder for a minority shareholder to prove the oppression claim. That is because the burden of proof lies with the minority shareholder.
Burden of Proof – Minority shareholders have the burden of showing oppression under the statute.
Hopkins Centrich Law
Diluting corporate governance rights
Stock dilution can reduce the corporate governance rights of minority shareholders. For instance, if a shareholder owns 100 voting shares in a company with 1,000 shares (10% stake) , issuing an additional 1,000 shares issued by the company would reduce the shareholder’s stake to 5%. As a result, their voting power is also reduced.
Majority shareholders often exploit share issuance to increase their voting power and reduce the ownership stake of minority shareholders, making their decisions less significant or eliminating their influence.
Executing freeze-out mergers
A freeze-out merger (self-dealing) occurs when controlling shareholders initiate a merger between an existing company and another company they control. This tactic can help a majority shareholder remove a minority shareholder by forcing them to sell their shares under drag-along provisions, which require the minority to sell their shares as part of the merger.
This merger structure is permissible in most jurisdictions but subject to fairness standards. It must be financially fair, meaning minority shareholders sell on the same terms as majority shareholders.
Also, corporate state laws require freeze-out mergers to be approved by a majority of minority shareholders and an independent review committee, as illustrated in Kahn v. M&F Worldwide Corp (2014), which is a long-standing legal precedent, and reinforced with In re Match Group, Inc (2024).
Invoking ‘long-standing’ precedent, the Delaware Supreme Court concluded that the MFW framework applies to all conflicted controlling shareholder transactions—including those outside the context of parent-subsidiary mergers.
Jones Day
These procedural protections limit the opportunities for unfair buyouts. However, even if such buyouts meet fairness standards and procedural requirements, they can still be emotionally and financially devastating to a minority owner and minority shareholders in the minority-of-the-minority group due to the lack of power and unwilling exit.
What rights does a minority shareholder have in mergers and acquisitions?
There are several minority shareholder protection rights in mergers and acquisitions, allowing them to fight unfair treatment and demand fair transaction terms.
Appraisal rights
Appraisal rights allow minority shareholders to seek an independent valuation of their shares in mergers and acquisitions. Minority shareholders who believe unfair treatment has taken place can exercise appraisal rights and initiate an independent business valuation to determine whether the share price reflects market value.
This is particularly valuable when majority shareholders exercise a forced buyout of shareholder shares under drag-along rights. In this circumstance, minority stockholders are often forced to sell below market value, which benefits majority shareholders on both sides of the transaction. Departing stockholder employees can be forced to sell their shares below market value, too.
…provisions [in a shareholder agreement] can create perverse incentives when coupled with another provision that requires a departing shareholder to sell his interest at a buyout price determined by a fixed formula – book value or perhaps even a fixed, nominal price.
Bristol & Benson, PLLC
In these circumstances, minority shareholders can leverage appraisal rights to secure the fair value for their shares. In the U.S., appraisal rights are widely available for minority shareholders in private companies.
The specifics of appraisal rights in public companies, however, may differ across jurisdictions. For instance, appraisal rights are denied to all shareholders of public companies in 11 U.S. states. The main reason is that shareholders of public companies must employ market share prices to measure the fairness of share valuations.
However, appraisal rights can be exercised when shareholders receive debt, cash, or mixed considerations. These exceptions are available in 28 states.
What happens to employees when companies merge? Check our dedicated article.
Tag-along rights
Tag-along rights are specific minority shareholder rights in mergers and acquisitions that allow them to join the business sale when majority shareholders decide to sell their stake.
They are crucially different from drag-along rights because they don’t obligate minority shareholders to sell. Instead, tag-along rights offer legal and financial protection to shareholders willing to exit the private business.
Because private shares are generally difficult to sell for individual minority shareholders with low bargaining power, tag-along rights prevent these shares from being left in the business when majority shareholders sell.
What happens to shareholders when a company goes private? Check our dedicated article.
Preemptive rights
A preemptive right allows existing shareholders to purchase newly issued company shares before they are offered to third parties. Shareholders are usually eligible to buy enough shares to maintain their current stake.
Preemptive rights protect minority shareholders against the dilution of shares in mergers or acquisitions, specifically when an acquiring company issues new shares to fund the transaction.
It’s worth noting that preemptive rights aren’t required by law, meaning that shareholders can’t use them unless corporate bylaws state so. Therefore, whether minority shareholders can use these rights largely depends on the corporation’s governing documents.
What happens to stock when a company is bought? Find this out in our dedicated article.
Legal recourse for shareholders
Minority shareholders are eligible for several remedies under both direct and derivative lawsuits.
Direct lawsuit
Minority shareholders can file direct lawsuits when seeking remedies for oppression from majority shareholders. A direct lawsuit addresses oppression, misconduct, and harm toward an individual shareholder (but doesn’t address harm to the company).
Derivative lawsuit
Shareholder derivative actions allow minority shareholders to sue majority shareholders on behalf of the company when seeking remedies against harm to the company itself, including direct and indirect damage to its shareholders.
Four common shareholder legal protections
Several legal remedies are available to shareholders, such as financial compensations and fair buyouts, however there are four that stand out. Several of these remedies complement each other, addressing a number of avenues to pursue damages made to minority shareholders.
Injunctive relief
An injunction is an effective means of shareholder dispute resolution. It involves ordering majority shareholders to perform specific actions to restore minority shareholders’ rights.
In this case, minority shareholder protection can also include appointing independent directors to manage the corporation, removing oppressive provisions from the corporation’s bylaws, such as amending a shareholders’ agreement.
Financial remedies
Minority shareholders can be compensated for damages suffered from oppression and corporate misconduct. This oppression remedy can be coupled with injunctive relief and other remedies.
Buyout options for minority shareholders
The court may order majority shareholders to purchase minority shares at a fair price, ensuring minority shareholders a clean exit under favorable terms. Sometimes, courts order a buy out of majority shareholders’ shares to stop oppressive conduct.
Dissolution of the corporation
Minority shareholders can seek company dissolution to address oppression. With low chances of meaningful cooperation, dissolution can sometimes be the only way to stop oppressive conduct.
It’s worth noting that sometimes shareholders may consider corporate governance disputes as shareholder oppression and seek corporate dissolution as a result. However, dispute-based dissolution petitions can be dismissed if there is insufficient evidence of oppression. In this event, the company is successful and the dispute is not a “true deadlock.”
Case study: Duffield v. Legend Spine, LLC, et al.
Duffield v. Legend Spine, LLC, et al. illustrates the financial oppression remedies awarded to W. Duffield, plaintiff, minority shareholder, and one of the five owners of Legend Spine, LCC. The plaintiff sued the majority owners for freezing him out of the business without payment for his shares.
The other four owners divided 192 W. Duffield’s shares among themselves and halted product development for personal gain following his removal from the business. The court awarded $2.5 million in compensation to W. Duffields on the claims of oppressive actions, breach of fiduciary duty, and breach of contract.
Case study: Grgurev v. Licul
Grgurev v. Licul illustrates a combination of remedies available to shareholders under oppression in closely held corporations. The case described the dispute between the co-owners of Ocinomled, Ltd. and Delmonico’s restaurant, which Ocinomled controlled. Plaintiffs Fedro and Omer Grgurev owned 50% of Ocinomled. Defendants Milan Licul and Branko Turcinovic controlled the remaining 50%.
Although the ownership was split evenly, Licul and Turchinovic exclusively managed the restaurant and exhibited oppressive behavior toward the Grgurev brothers. Licul and Turchinovic withheld the company’s books from the Grgurevs, terminated their salaries, and attempted to buy out their shares. Following a long legal battle, the court ordered several remedies in favor of the Grugrevs:
- Financial remedies
Fedro and Omer Grugrevs were awarded $1.75 million each to compensate for the losses from misconduct and oppression from Licul and Turchinovic.
- Equitable dissolution
Ocinomled, Ltd. was dissolved, while Licul and Turchinovic transferred their corporate ownership rights to the Grgurevs. The Grurgevs gained 100% of Delmonico’s.
- Injunctive relief
Licul and Turchinovic were prohibited from running a hospitality business under the trademark “Delmonico’s” for two years, within a one-mile radius of the location of Delmonico’s restaurant. Additionally, Licul and Turchinovic were required to transfer their alcoholic beverage license to the Grugrevs and produce accounting records for Ocinomled from 2011 to 2019.
This case is impactful because it extends the petition to seek dissolution of a closely held company (in New York) not only to minority shareholders but also to 50% shareholders.
Additionally, it was the first decision in a New York practice to compel defendants’ to give up their shares following shareholder oppression. Since shareholder oppression can take many forms, and corporate laws differ across jurisdictions, it’s advisable to consult with a business lawyer before taking legal actions.
Key takeaways
- Minority shareholders have the right to fair treatment, dividends, information, and voting. The fiduciary duty of majority shareholders requires honoring and protecting the rights of minority shareholders.
- Minority shareholders have the right to initiate independent share appraisal, request the opportunity to sell their shares on the same terms as majority shareholders, and purchase additional shares to avoid dilution in mergers and acquisitions.
- When facing oppressive conduct, minority shareholders can require specific actions to stop misconduct, receive financial remedies, and request company dissolution.
