Minority Shareholder Oppression

By A. Todd Campbell, Associate

In closely-held businesses, shareholders often also serve as the officers and directors of the company and as a result, these individuals have to make important business decisions.  Inevitably, shareholders in a closely-held business will disagree over a certain strategy or the direction of their company.  Generally, in this situation the majority shareholder wins.  If the shareholders continue to disagree on major company issues going forward, the majority shareholder may retaliate against the minority shareholder.  When this situation occurs, it is referred to as “minority shareholder oppression or squeeze-out.”

Shareholder oppression can take many different forms such as when the majority shareholder: refuses to allow inspection of corporate and financial records; withholds information; fails to pay dividends; siphons off earnings through the payment of excessive salaries, bonuses or favorable loans to the controlling shareholder, rather than as dividends; usurps corporate opportunities; pays excessive rent for the property the company leases from the majority shareholder; appropriates corporate assets for personal use; dilutes through undue expansion or stock inflation; sells assets of the company at an inadequate price to the majority shareholder or to companies in which the majority is interested; and offers to buy-out the minority shareholder’s interest in the company for less than fair value.

The majority shareholder will use any combination of the aforementioned oppressive tactics to “squeeze-out” the minority shareholder.  In doing so, the majority shareholder uses its right of control to put the minority shareholder into a situation where he or she only has two, equally unappealing option:  (1) hold his or her stock in perpetuity while receiving no earnings thereon or (2) sell out at an unreasonably low price to the majority shareholder.  Accordingly, “[t]he oppression-and-squeeze-out cause of action is corporate law's remedy for this ‘specific kind of unfairness, whereby the majority of the shareholders in a close corporation is able to use its right of control to exert pressure upon, i.e., to ‘squeeze,’ the minority by reducing or eliminating its income, coupled with the minority's practical inability to withdraw.’”  Davis v. Dorsey, 495 F. Supp. 2d 1162, 1168 (M.D. Ala. 2007).

When a falling out amongst shareholders occurs, it can feel like the end of the world.  A minority shareholder may lose their employment, income and net worth.  In this situation, a minority shareholder can feel as if they are completely at the mercy of the majority shareholder.    Under these circumstances, many times the best solution is simply a “business divorce” amongst the shareholders.  If the majority shareholder is violating the rights of the minority shareholder, such as in any of the ways described above, the oppressed shareholder may have grounds to file a lawsuit. 

At Campbell Guin, we have successfully litigated numerous shareholder oppression actions.  We represent minority shareholders facing an oppressive majority by protecting their rights and attempting to resolve their case as quickly as possible.  On the other hand, we represent majority shareholders and advise business owners or how to prepare for and avoid litigation.  Whatever your situation may be as a shareholder or business owner, we will work to deliver results for our clients and protect their interests in the businesses that they own.

Hannah Benak