Shareholder Oppression Explained

Shareholder Oppression Explained

Being a minority shareholder of a closely held business comes with the risk of shareholder oppression. However, many minority shareholders or those considering purchasing a minority interest in an Illinois closed corporation do not have a good understanding of what shareholder oppression is or what statutory rights minority shareholders have in the state of Illinois.

What is Shareholder Oppression?

A minority shareholder is a shareholder who owns less than a 51% interest in a company and does not have a majority control over the business. Shareholder oppression occurs when minority shareholders are denied their rights as shareholders or when majority shareholders act in a way that favors the majority or unfairly prejudices the minority. Illinois courts have found shareholder oppression where the majority shareholder’s conduct is arbitrary, heavy-handed, overbearing, or illegal. Examples of shareholder oppression may include when a majority shareholder diverts profits to the majority or mismanages company assets. Shareholder oppression often occurs in smaller closely held companies where majority shareholders typically are able to control the day to day business of the company regardless of the minority and minority shareholders lack a market to easily sell off their shares.

Common Examples of Shareholder Oppression

Shareholder oppression often occurs as part of a plan by majority shareholders to force minority shareholders to sell their interest in a company at unfairly low prices, called a squeeze out, or to deprive minority shareholders of any rights or benefits of being a shareholder, known as a freeze out. Some common examples that the shareholder oppression attorneys at Lubin Austermuehle have dealt with in their more than three decades of experience litigating shareholder oppression disputes include:

• Refusing to allow a minority shareholder to inspect the company’s books and records
• Draining company profits through inflated salaries and bonuses to the majority, leaving little or nothing to distribute in dividends
• Locking a minority shareholder out of company property
• Cutting a minority shareholder out of management decisions
• Refusing to notify a minority shareholder of official shareholder meetings
• Creating a stock redemption plan that favors only the majority shareholder
• Altering corporate bylaws or operating agreements to remove or diminish a minority shareholder’s rights
• Using company funds to pay for the majority’s personal expenses
• Attempting to force a repurchase the minority’s shares at an unfairly low price
• Accepting a cash merger that eliminates a minority shareholder’s interest in the company

How to Prevent Shareholder Oppression

The best way for minority shareholders to protect themselves from shareholder oppression is to make entering a shareholder agreement a prerequisite for buying a minority interest in a company. Shareholder agreements typically define the respective management and voting powers of the shareholders, apportionment of losses and profits, payment of dividends, and redemption and sale rights and limitations. These contracts between shareholders are most direct and easy method for protecting minority shareholder’s rights and avoiding many of the oppressive actions outlined above. If you are considering entering a shareholder agreement or purchasing a minority interest in a business, it is always advisable to seek advice from an experienced business and shareholder rights attorney.

Rights and Remedies for Shareholder Oppression

Minority shareholders in Illinois closely held businesses have rights and remedies under the Illinois Business Corporation Act in the event of shareholder oppression. Some of the statutory remedies available to oppressed minority shareholders include:

• Requiring an accounting of any matter in dispute
• Appointing an independent custodian to manage the business or a matter in dispute
• Changing or altering the official company documents such as the bylaws or articles of incorporation
• Requiring or proscribing certain actions of the business or its officers, directors or shareholders
• Removing or appointing officers or directors of the company
• Paying dividends owed
• Requiring the purchase of a minority shareholder’s shares by the majority shareholder or the company
• Awarding monetary damages
• Dissolving the company

Our Chicago and DuPage County minority shareholder and LLC member attorneys have litigated minority oppression, business divorce, stolen corporate opportunity and breach of fiduciary duty lawsuits for more than three decades. If you’re the victim of shareholder oppression or a breach of fiduciary duty would like to discuss how the experienced Chicago shareholder oppression lawyers at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago shareholder rights attorneys and Chicago business trial lawyers, please call us toll-free at 630-333-0333 or contact us online.

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