Minority Shareholder Oppression

Minority Shareholder Oppression is conduct by the controlling or majority shareholders of a small corporation that materially impairs or reduces the value of the minority shareholder's interest in the corporation. Sometimes shareholder oppression can be financial elder abuse. This can be done in a number of ways including:

  • Violating the rights of minority shareholders which usually includes providing them with no financial or other operating information,
  • Reducing or eliminating the economic benefits of stock ownership, and
  • Making it nearly impossible to find an outside investor to buy the minority owner's shares of stock,

Minority shareholder oppression is usually designed or intended to squeeze out or freeze out the minority shareholders by forcing them to sell their shares to the majority shareholders at a low price.

Majority shareholders have been known to maliciously eliminate the payment of dividends while paying themselves excessively high salaries and other monetary benefits such as bonuses.

What has been described above also applies to limited partners in limited partnerships as well as other investors with a minority or non-controlling interest in other types of entities.

There is a remedy for minority shareholders, limited partners and other investors in California. California courts have recognized that majority shareholders and others in control of business entities owe fiduciary obligations to minority shareholders(and other minority investors). In California, the controlling majority must act for the benefit of all shareholders or investors, and not solely for their own benefit.

Remedies include monetary damages for breach of fiduciary duties and permanent injunctive relief to prevent further breaches. In some circumstances, courts may award punitive damages, Lastly, but most importantly, Section 1800 of the California Corporations Code sets forth the elements for seeking an involuntary dissolution of a corporation where those in control have been guilty or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority, or persistent unfairness toward any shareholders, or the corporation's property is being misapplied or wasted by its directors or officers,

Under California law, an action for involuntary dissolution may be maintained by one or more shareholders owning at least one- third of the equity of the corporation exclusive of the shareholder guilty of the wrongdoing. For example, shareholder Smith owns 51% of the shares of a corporation. Jones and Rogers jointly own 17% of the shares. Since Jones and Rogers own more than one-third of the 49% not owned by Smith, they have standing to sue for an involuntary dissolution of the corporation.

This article is not intended of offer legal advice. If you are a minority or majority shareholder involved in a dispute with another shareholder, you should contact an attorney or mediator.

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