Corporations are organized by individual state, and on issues concerning their governance corporations largely fall under their home state law. Fortunately, however, most states have adopted uniform business law legislation. As a result, while each state is different, corporate laws on minority shareholder rights will be similar regardless of whether the corporation was formed in Ohio, Illinois or Nevada. Most minority shareholder legal rights are spelled out in state statutes.
What are Minority Shareholders?
Minority shareholders are shareholders in closely held corporations; that is, corporations with just a handful of owners. They are called minority shareholders because they typically own less than 50 percent of the company and do not have a controlling interest in the corporation.
How are Minority Shareholders Different Than Other Shareholders?
Minority shareholders are different than shareholders in large, publicly traded corporations. The main difference is that shares in large, publicly traded corporations are easily valued and easily sold. If a shareholder in a publicly traded corporation does not like the direction of the company, he can quickly sell his shares by contacting his broker or selling the shares on his own through his online brokerage account.
Minority shareholders in closely held corporations cannot easily sell their ownership stakes. First, the stock of closely held corporations is not sold on a public stock exchange. As a result, the value of the stock cannot be easily valued nor can it be easily sold. Because the stock is not readily marketable, the legal system has established certain rights to protect the interests of these minority shareholders.
What are the Rights Common to all Corporate Shareholders?
State laws expressly spell out a number of rights that shareholders possess regardless of the size of the corporation. These usually include the right to attend and vote at annual shareholder meetings either personally or through proxy. The rights also include the ability to review information about the company, including books and records of the company, along with a list of all shareholders. Finally, these rights include the right to vote on major corporate events such as on corporate directors, mergers, dissolution, sales and amendments.
Unfortunately, these rights may not have much utility in a close corporation when majority shareholders oppress minority shareholders. As a result, close corporations have special rights for minority shareholders.
Read More: Responsibilities & Rights of a Corporation Shareholder
What are the Rights Common to Only Minority Shareholders?
While the rights common to all shareholders can be useful in a close corporation situation, additional rights are needed to protect minority shareholders from being oppressed by the majority shareholders. As a result, the legal system has devised rules to protect the minority.
Instead of being permitted to govern in a manner that would benefit the majority of the shareholders as in a large corporate setting, closely held corporations are required to operate under rules and regulations much more akin to a partnership. Under most close corporation laws, the majority shareholders owe a fiduciary duty to the minority shareholders. This means that majority shareholders must deal with minority shareholders with candor, honesty, good faith, loyalty and fairness. Courts have typically held that majority shareholders breach these duties when they form companies to compete directly with the corporation, pay themselves high salaries and/or dividends and/or sell stock of the company at favorable terms only to themselves.
Scott A. Pullins has been an Ohio based business and public affairs consultant and attorney. He has advised clients on complex legal, business, marketing and public policy issues. Most recently he worked as a default analyst for the Mortgage Banking Executive Office for JPMorgan Chase Bank NA.