Corporations are owned by shareholders and those shareholders can be either majority or
A minority shareholder is a shareholder that owns less than 50% of the corporation’s shares and doesn’t have majority control over the corporation, while a majority shareholder holds more than 50% of the corporation’s shares and also holds a majority of the control of the corporation. Since majority shareholders own more than 50% of the corporation, they have more voting power over the corporation’s decisions. This leaves minority shareholders with little decision-making power.
However, there are protections in place for minority shareholders, and it’s important for shareholders to be aware of those rights. Recent cases have found in favor of minority shareholders when the controlling shareholders abused their positions, enriched themselves at the expense of minority shareholders, misused corporate assets, and engaged in other oppressive conduct. Without knowing their rights, minority shareholders won’t know when their rights are being denied. A few of the most important minority shareholder rights include:
- 1. Right to Information: Under the Code of Virginia, all shareholders are entitled to “inspect and copy” certain corporate records during regular business hours after providing written notice. These corporate records include minutes from shareholder meetings; records of actions taken by shareholders; accounting ledgers and financial statements for the last three years; historical list of shareholders; current bylaws and articles of incorporation and any resolutions adopted by the board of directors; all written communications to shareholders within the last three years; a list of the names and business addresses of current directors and officers; and the most recent annual report.
- 2. Right to Be Treated Fairly by Corporate Officers and Directors: Corporate officers and directors have a fiduciary duty in their dealings with shareholders and they must exercise good faith in such dealings with shareholders. This fiduciary duty includes the duty of care and the duty of loyalty and requires officers and directors to act with a good faith business judgment of the best interests of the corporation.
- 3. Right to Seek Legal Recourse: Minority shareholders have the right to seek legal recourse if they are denied any of their rights by majority shareholders or directors of the corporation. The Code of Virginia allows for judicial dissolution of a corporation if the directors act in a way that is illegal, oppressive, or fraudulent and provides some protection for minority shareholders. Additionally, while derivative actions are filed on behalf of the corporation based on the rights of the corporation, rather than shareholders, they offer protection for minority shareholders if directors and officers breach their fiduciary duties to act in the best interests of the corporation.
Virginia courts have begun taking a much more expansive view as to what type of conduct is “oppressive” and are showing increasing support for minority shareholders. Minority shareholder oppression is, generally, conduct that departs from the standards of fair dealing and violates the principles of fair play on which shareholders are entitled to rely.
In a 2012 decision, Colgate et al v. The Disthene Group, Inc., an action was brought by minority shareholders alleging that the majority shareholders engaged in a pattern of oppressive and fraudulent conduct that was designed to disadvantage them and waste corporate assets. The court ultimately ruled in favor of the minority shareholders, and also specifically noted that non-voting shareholders have the right to be treated fairly by the corporate officers and directors. The court found that the officers and directors breached their duties by: reducing dividends in retaliation for minority shareholders filing a lawsuit; misrepresenting the value of stock when negotiating with minority shareholders who were selling shares back to the company; increasing compensation for majority shareholders; misusing and wasting corporate assets; favoring interests of family members at the expense of minority shareholders; and refusing to allow inspection of corporate books and records. The judge ultimately ordered the dissolution of the closely held corporation because of this oppression of minority shareholders and waste of corporate assets.
Again, in a 2019 case, May v. R.A. Yancy Lumber Corporation, the court found in favor of the minority shareholders. There, the majority attempted to amend the corporation’s bylaws to circumvent the intentions of the minority shareholders. The majority shareholders wanted to sell part of their business, but minority shareholders did not wish to sell and under Code of Virginia § 13.1-724, the sale would require more than two-thirds shareholder approval, which the majority shareholders didn’t have. The majority shareholders amended the corporation’s bylaws intending the amendment to act in lieu of the statute and allow the sale. However, the court noted that the statute was intended as a protection for minority shareholders, and the majority shareholders couldn’t get past the statute’s requirement by amending the bylaws.
These cases highlight the importance of knowing your rights as a minority shareholder. Controlling shareholders may try to engage in oppressive tactics or abuse their positions as majority shareholders. Being aware of your legal protections and entitlements will help ensure your rights aren’t being denied. To find out more about your rights as a minority shareholder, contact General Counsel, PC today at 703-991-7973 or email@example.com.