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Recognizing minority shareholder oppression

On Behalf of | Jun 8, 2021 | Business Law

Minority shareholder oppression is not always easy to recognize. In general, it occurs in privately held companies where it is easier for a handful of majority shareholders to exploit the minority by not protecting their interests. A common example is when the majority shareholders make decisions that are in their own best interest, to the detriment of the minority shareholders.

Whether motivated by greed, interpersonal conflict or the perception that the minority shareholders are not contributing enough, this oppression holds the economic benefits of ownership hostage and dilutes its value. The tactics that the controlling majority uses generally fall into two categories. These include reducing economic benefits and excluding minority shareholders from company management and access to financial data.

Economic benefits

One of the oppressing majority’s more common tactics is to keep a larger portion of the company’s profits. By paying excessive salaries and bonuses to the majority shareholders, operating profits are lower than they would otherwise have been. A lower profit margin is then used as an excuse to refuse to pay dividends.

Minority shareholders may not only find their capital investment useless, but they also may be unable to sell their shares. In a privately held corporation, the only option may be to sell the shares to the controlling majority at a reduced price.

Exclusion

The majority shareholders may use other tactics to make the controlling behavior possible. For example, excluding minority shareholders from management positions means they are not likely to access financial data. This may prevent them from noticing the excessive payments to the majority.

It is important to note that not every decision made by the majority constitutes shareholder oppression. The best protection for everyone is a shareholder agreement that defines ownership terms and reasonable shareholder expectations.