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Stachler Harmon Attorneys at Law Oct. 12, 2020

Minority shareholder oppression can lead to shareholder oppression suits. A minority shareholder has to show that the majority shareholder breached a fiduciary duty.

Almost 90 percent of the businesses in the U.S. are closely held companies, according to the Wall Street Journal. The Internal Revenue Service defines a closely held business as a business entity where more than 50 percent of the value of its outstanding stock is directly or indirectly owned by five or fewer individuals. Closely held companies are usually owned and run by families or long-time friends, and those who own and operate these types of businesses often have a lot invested in them - both financially and emotionally. When conflicts about business decisions arise, they can lead to allegations of minority shareholder oppression and even shareholder lawsuits.

Minority Shareholder Oppression

Minority shareholder oppression usually happens when the majority shareholder wants to devalue the minority shareholder's interest in the business, called "squeezing out" or "freezing out." Minority oppression can take several forms, including firing the minority shareholder, voting the minority shareholder of the governing board, voting to prevent dividend payments, or even dissolution and reacquisition of the business. Not all action taken against a minority shareholder is de facto freeze out. In some cases, such as when the minority shareholder has committed fraud or usurped a business opportunity, there is a legitimate business purpose for the action.

Shareholder Oppression Suits

If a minority shareholder believes a majority shareholder is deliberately trying to freeze the minority shareholder out, the minority shareholder can bring a lawsuit alleging that the majority shareholder breached its fiduciary duties of good faith, care, and loyalty to the minority shareholder by trying to use its majority control over the business to deny the minority shareholder an opportunity to benefit without a legitimate business purpose.

The minority shareholder has the burden of proving that the majority shareholder acted without a legitimate business purpose. The court follows what is called the business judgment rule, which means that it presumes that majority shareholders act in good faith and with due care. The minority shareholder must demonstrate to the court that the majority shareholder breached a fiduciary duty, and if the minority shareholder cannot do so the court will not substitute its business judgment for that of the majority shareholder.

If a minority shareholder overcomes the burden of the business judgment rule, the court will assess the majority shareholder's actions looking at either the fairness of the entire transaction or the minority shareholder's reasonable expectations for the business.

Consult a Lawyer

Shareholder disputes are very fact-specific and are often very complicated. If you or your business are involved in a shareholder dispute, you should confer with an attorney with broad experience handling these difficult matters. An attorney can help you minimize the damage to your company and protect your business interests.