What Is Minority Shareholder Oppression That Can Lead to Litigation

Many businesses have only a few owners or shareholders. This is particularly common among closely held businesses. It is the owners who decide major issues such as selling or purchasing assets, merging with another company or declaring dividends. However, not all owners are equal. Individuals who own the majority of the shares have the greater say on these decisions. Minority shareholders have limited power, but they are nonetheless entitled to certain rights. When these rights are infringed, it may constitute shareholder oppression that creates a legal right of action.

Shareholder oppression, in order to be actionable, must comprise conduct that is fraudulent, unfair or illegitimate. Being outvoted on a given issue does not constitute oppression. The majority’s action must be inherently unfair and harmful to the minority’s interests. Examples of shareholder oppression include:

  • Income diversion  The majority owners might divert the company’s net profits to themselves to the prejudice of the minority owners. This can be done in a number of ways, some of which are either fraudulent or illegitimate.
  • Share dilution  The majority owners might pass bylaws that reduce the voting power of the minority. This creates an even bigger power imbalance and gives the majority even greater leverage over the minority shareholders.
  • Denial of access  Minority owners might be denied access to the company’s books and records or they might be restricted from attending official company meetings or entering upon company property.
  • Employment  In many small companies, shareholders are also employees. Sometimes the majority will vote to terminate a minority owner’s employment and remove their access to company property and records.
  • Withholding dividends — Owners typically derive a percentage of the company’s net profits based on their shareholdings. Sometimes majority owners vote to keep the dividend within the company rather than distribute profits. Doing so can cause minority shareholders financial hardship. For some owners, company dividends are a large percentage of their income.

Minority shareholders do have remedies. A Kentucky statute allows a shareholder may seek a court order dissolving the company upon showing that the directors or those in control have acted, are acting or will act in a manner that is illegal or fraudulent. In addition, a minority owner can bring a lawsuit asking the court to use its equitable powers to craft a remedy. The court may enjoin or stop the majority from taking further oppressive actions and reverse those that have already been implemented. The court could also order majority members to buy out the minority at a given price. An experienced business litigation attorney can analyze your situation and advise on appropriate action.

Hemmer Wessels McMurtry PLLC in Fort Mitchell serves the Kentucky business community in wide range of matters, including shareholder oppression cases. Please feel free to contact us online or call 859-344-1188 to set up a consultation.