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 512-960-3919.
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.
While many minority shareholders have some say over the company’s affairs, the majority shareholder will typically have the most control over the corporation.
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.
Inspection 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.
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.
Derivative Lawsuit
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.
Direct Lawsuit
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.
Get in Contact With a Business Lawyer 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 512-960-3919 to arrange your initial consultation.
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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