Although most co-owners or shareholders start their business aligned in their goals and their direction for the company, that doesn’t always remain the case. When the business is less successful than expected or more successful than anyone could have hoped, perspectives change. Shareholders may start to disagree about business expenses and strategies. Add to that the fact that some shareholders may reap greater benefits, such as salaries and company perks, while more passive investors may not.
Minority shareholder oppression in closely held companies can unfairly affect the rights of minority owners and have lasting consequences for the business itself, and it is important for anyone involved in the business to be aware of the liabilities associated with it. Majority owners may wonder where to draw the line between the legitimate use of majority rule and taking unfair advantage over the minority. Oppression generally occurs when majority shareholders take actions that unfairly diminish the rights of a minority shareholder or frustrate the reasonable expectations of a minority owner, such as limiting their ability to influence corporate decisions or denying them a fair share of profits.
What is minority shareholder oppression?
A minority shareholder of a corporation is one who owns less than 51% and, as a result, does not have majority control over the business. Minority shareholder oppression is the result of the majority shareholder, or shareholders, using their voting rights to unfairly hinder the economic or other rights of the minority shareholder.
Why does minority shareholder oppression happen?
Shareholder oppression can result from a variety of motives, whether it be a desire to cut minority shareholders out of general decision making or to push through a specific transaction to which the minority objects. But it often happens because the majority stands to reap some financial benefit at the expense of the minority. Oppression can be done directly by refusing to declare dividends to all shareholders, while paying the majority shareholders higher salaries, or more indirectly, such as hiring family members or close friends of the majority, while denying the same opportunities to the minority.
Forms of minority shareholder oppression
Minority shareholder oppression can take many forms and depends on the specific facts of each case. Oregon courts have found shareholder oppression in cases where:
- the majority diverted a corporate opportunity to themselves,
- terminated the minority shareholder’s employment with the company and excluded them from management decisions contrary to the minority’s reasonable expectation of continued involvement; and
- breached their fiduciary duty to the minority by engaging in self-dealing.
Some forms of oppression may go unnoticed, at least at first. For example, a major shareholder could hire a family member as a contractor for a project that doesn’t exist but pay them as if they did the work or cause the corporation to pay for or reimburse the majority shareholder for expenses other employees do not receive.
Consequences of minority shareholder oppression
When a minority shareholder has been oppressed, they can initiate a lawsuit against the majority to resolve the dispute. The oppressed shareholder can seek a variety of remedies, including dissolution of the corporation. Most courts have recognized broad authority to craft equitable remedies to protect minority shareholders, the most common of which is a court-ordered purchase of the minority’s shares for fair value. In Oregon, ORS 60.952 includes a menu of potential remedies the minority may request, including removal of an officer or director, appointment of a custodian to manage the business, an accounting of any part of the dispute, submission of the dispute to mediation, an award of damages, a buyout for fair value, and dissolution of the corporation. If a minority shareholder chooses to file suit under this statute, the majority or the corporation may elect to buy out the minority shareholder for fair value and proceed to a valuation trial rather than continuing to litigate the oppression dispute. ORS 60.952(6). This “no-fault divorce” option can help keep litigation costs down. But not all states have adopted similar laws.
We can help
If you are a majority shareholder and are considering taking action that will benefit you personally but not the minority shareholder(s), it’s wise to seek legal advice to identify potential risks before you proceed. If you are a minority shareholder and believe the majority shareholder(s) are influencing company decisions that unfairly benefit them and not you, you should consult legal counsel and evaluate what remedies you may have under Oregon’s minority shareholder oppression statute and common law. Chenoweth Law Group’s lawyers have extensive experience handling minority shareholder oppression cases, with an initial focus on a negotiated resolution and taking the case to trial if negotiation fails.