Companies usually start up with the infusion of funds that help to get the new enterprise off and running. That initial investment, usually expressed as a percentage of stock, will grow in value along with the company. As the business expands, it is important for this shareholder relationship to develop in ways that not only protect the initial investment, but also the rights of minority shareholders.
When business relationships sour, however, disputes may crop up that result in oppression of these rights by majority shareholders. Minority shareholder oppression, which generally occurs in privately-held corporations, can give rise to claims that include:
- Freeze-outs, in which minority shareholders are barred from entering their offices,
- Squeeze-outs,
- Employment termination,
- Reduction of compensation or voting power,
- Denial of access to company records.
Protecting minority shareholder rights
Even though minority shareholders do not have the sway to change or redirect operations in a company, they do have rights that must be clearly articulated in the shareholder’s agreement. Some of these include:
- Rights of access to lists of shareholder holdings and percentages
- Voting rights to appoint directors and officers
- Pre-emptive rights to purchase new shares, including right of first refusal on existing stock
- A shotgun clause that ensures minority rights to buy or sell shares
- Piggyback rights should a majority shareholder sell shares
- A fair valuation of shares that guarantees protection of the shareholder’s stock when it comes time to sell
- A capital expenditure approval clause that spells out minority rights to approve a significant expenditure of capital in order to protect their investment
Legal recourse in a squeeze-out
Although there are no specific California statutes related to shareholder oppression, there are opportunities for relief in the form of actions for a breach of the major shareholder’s fiduciary duty, involuntary dissolution of the corporation, or the filing of a derivative lawsuit. There are also non-litigated options that are not only less expensive, but also provide a clear exit plan that will protect the assets, reputation and credit of the minority shareholder.
Having the detailed financial experience of skilled legal counsel serving Irvine and Southern California can help you to decide on the best strategy to implement that will protect your rights as well as serve your interests.
