Being a business owner is a great experience. The pride of watching a company grow is second to none, and being a part of that process is amazing.
But sometimes, even the strongest businesses can run into problems.
What happens when you are not the controlling owner of a company?
Do you have any rights, or are you at the mercy of the other owners? This article will walk you through minority shareholder rights and common concerns.
If you have questions, please contact the Austin business law attorneys at Massingill today. You can also call (512) 410-0343.
We can help answer questions about minority shareholder protection.
A minority shareholder is a shareholder who does not have control over a corporation. Typically, the minority shareholder has less than 50% of the corporation’s voting shares.
Minority shareholders vote on major company actions, including board elections, mergers, and corporate changes. While they lack controlling power, their votes influence corporate direction.
In most cases, minority shareholders have at least some rights. Most Texas corporations will discuss the rights of shareholders in the company’s bylaws.
In most companies, shareholders will have the right to vote on certain corporate matters, such as the election of directors.
Some corporations utilize separate share classes, and some classes may not have voting rights. Additionally, shareholders may have certain rights under Texas law.
Often, there will be a shareholder agreement–even in private companies–that lays out your rights as a shareholder.
You should understand how important a shareholders’ agreement is in protecting yourself as a minority shareholder. In Ritchie v. Rupe, the Texas Supreme Court stated that when there is no shareholders’ agreement, the rights of minority shareholders regarding voting and running the business are fuzzy at best.
In other words, minority shareholders lack any statutory or common law rights to demand an equal say. Without a contract spelling out the rights of minority shareholders, these holders are at risk of abuse by majority shareholders.
Right to Inspect Books and Records
One crucial tool for minority shareholder protection is the right to inspect the books and records of the corporation.
Under Texas law, you may inspect the books, records of account, minutes, and share transfer records of the corporation, so long as you:
- Make a written request stating a “proper purpose” for the inspection and
- Have held shares in the corporation for at least six months preceding the request or have at least a 5% interest in the corporation.
Assuming the above criteria are met, you should be given a reasonable time to inspect the books and records either in person or through an attorney, accountant, or agent.
Dividend Rights
Generally, a Texas shareholder cannot compel a corporation to make a dividend. The decision to issue a dividend is typically left to the directors of a corporation.
However, directors should not make such distributions in bad faith. Wrongfully withholding dividends or paying improper dividends could breach the director’s fiduciary duty.
If the directors honestly believe withholding dividends is in the best interest of the corporation, however, then proving there was a breach of fiduciary duty is more complicated.
As discussed above, being a minority shareholder can sometimes mean you are at the will of the other shareholders.
While many shareholders can constructively work with each other, sometimes this is not the case. Unfortunately, sometimes a majority shareholder may try to “freeze out” or oppress minority shareholders.
This can include things like:
- Keeping minority shareholders out of management decisions,
- Terminating employees who are minority shareholders,
- Restricting minority shareholders from transferring their interest,
- Withholding dividends (see above), and
- Diluting the interests of a minority shareholder.
Some states have statutes that allow shareholders to file a lawsuit in cases of minority shareholder oppression.
Texas Law
Unfortunately, Texas does not have a minority shareholder oppression statute. Directors and officers have flexibility when making decisions on behalf of the corporation.
Most likely, lawful decisions will be upheld when they are made in the corporation’s best interest.
That said, when decisions are made that represent a breach of a fiduciary duty or apparent wrongdoing, a shareholder may be able to file a lawsuit.
If you believe your minority shareholder rights have been oppressed, you can take several different legal actions that we will discuss below. However, lawful decisions of the corporation will generally be upheld if they are in the corporation’s interest, even if they do not benefit or even harm the minority shareholders.
If the company or board makes decisions that represent a breach of a fiduciary duty or demonstrate wrongdoing, a shareholder may be able to file a lawsuit. This is important because without owning a majority of shares, minority shareholders often have little say in how the business is run.
Even more important, minority shareholders have few ways to sell their shares and move on if they feel oppressed. Most shareholder oppression occurs in closely held corporations and private companies. In these situations, minority shareholders may be unable to find a market for their shares, or may even be restricted from selling without majority agreement.
Are you concerned about minority shareholder oppression and are ready to find a clear path forward? Book a consultation with Massingill Law now.
In Texas, shareholders can sometimes file a lawsuit against directors who have breached their fiduciary duties to the corporation.
These are called derivative proceedings under Texas law. A derivative proceeding allows you to file a lawsuit on behalf of a corporation.
A shareholder can file a derivative lawsuit when the management of a corporation, such as officers or directors, is taking actions that harm the corporation.
Still, the corporation itself will not remedy the situation. Texas law gives corporations time to fix the issue.
To bring a derivative proceeding, the shareholder needs to provide written demand to the corporation stating the wrongdoing and asking the corporation to take action.
The shareholder has to wait 91 days from the date of written demand before proceeding with the suit.
If the corporation, the majority shareholders, or its management is intentionally violating your rights as a shareholder, you may be able to file a direct lawsuit against the responsible parties.
As discussed above, it is difficult to succeed in a suit for shareholder oppression if the action is legal and standard business practice.
For example, not allowing a minority shareholder to be involved in decision-making might be frustrating for the shareholder, but it is typically legal in Texas.
That said, if the action is a violation of Texas law or represents a breach of fiduciary duty, then it may form the basis of a valid lawsuit.
For example, when a corporation issues a dividend but does not pay it to a shareholder legally entitled to the dividend, that shareholder likely has a viable claim.
Shareholder oppression can take many forms, not just failing to pay dividends or keeping minority shareholders out of management decisions. If you are a victim of shareholder oppression, a qualified shareholder rights attorney can help you navigate your claims and potential remedies.
Some typical remedies include:
- Awarding damages,
- Ordering the majority shareholder(s) to take specific actions,
- Revising or invalidating some or all of the corporation’s bylaws and other organizing documents,
- Issuing injunctions to prevent further harm,
- Ordering majority shareholders to purchase minority shares for fair value, and
- In cases of severe minority shareholder oppression or fraud, dissolving the business.
When you need minority shareholder protection, a Texas business lawyer can help you get the answers and remedies you seek. Ready to begin?
Contact a member of the Massingill Law team today online or by phone.
Protect your Rights—Consult a Business Lawyer for a Free Consultation Today
Claims of minority shareholder oppression are usually complicated and hard to prove. They also require extensive knowledge and a lot of experience in business organization law.
If a corporation violates your minority shareholder rights, you deserve an attorney who understands these claims.
The business law attorneys at Massingill have extensive experience in business and corporate law. We understand the complexities of being a minority shareholder and want to help make sure your minority shareholder rights are protected.
Contact us online today or call (512) 410-0343 to arrange your initial consultation.
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Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.
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