Why are Minority Shareholders Oppressed?

The ever-present temptation by those in control is to abuse the rights of those who are not. In the business context, this often manifests itself in the abuse of minority shareholders or members, in the case of limited liability companies, by controlling shareholders or members. This abuse may be a tactic to force a minority shareholder to sell his interest at a steep discount (i.e. a “squeeze-out”) or to deprive a minority shareholder of the benefit and value of his interest (i.e. a “freeze-out”).

Alternatively, particularly in family-owned closely held corporations, the controlling shareholders may oppress minority shareholders—who are often non-family members—by using corporate assets to benefit the family at the expense of the company and its shareholders. Because the stock of closely-held corporations generally is not readily sellable, minority shareholders at odds with controlling shareholders may feel helpless, without the power to affect the actions of the company and without the ability to easily withdraw their investment.

Controlling shareholders are aptly named because they exert control over the day-to-day activities of the business. Sometimes a single shareholder may have enough power to allow it to exercise this control over the company. Other times this power rests in a small group of closely aligned shareholders. Regardless of the number of shareholders that make up the group of controlling shareholders, the effect is the same: the controlling group will vote through their agenda. This can manifest itself in offering perks benefitting the controlling shareholders or voting the controlling shareholders, their family members, or friends to board positions or high-ranking positions within the company. Minority shareholders in these situations often feel helpless as they cannot elect officers or directors to protect their interests nor can they win any vote submitted to the shareholders to stop such conduct. In short, the influence minority shareholders can exert is limited to that which the controlling shareholder or shareholders permit.

As long as the interests of the majority and minority shareholders are aligned, minority shareholders may give little thought to their own lack of control of the company. However, when those interests inevitably diverge, minority shareholders may feel the oppression acutely. Without a shareholder agreement addressing minority shareholders’ rights, minority shareholders lack both contractual rights and voting power and may have no control over how these divergences in interests are resolved. Because they have no market in which to sell their shares, minority shareholders may feel forced to simply put up with the oppression as they have nowhere to go to recoup the value of their investment of time, talent, and treasure. In short without the proper contractual safeguards in place in the corporate governance documents, such as the articles of incorporation, corporate bylaws, or outside the United States the memorandum of association, minority shareholders are vulnerable to oppression.

In either an attempted freeze-out or squeeze-out, controlling shareholders typically use many of the same tactics to oppress minority shareholders. These tactics involve cutting off the minority shareholders from access to corporate books and records. Equally common are actions taken to remove minority shareholders from any participation in management of the company. With the governance and decisions of the company shielded from the minority shareholders, the majority will nearly always seek to manipulate the finances of the corporation to benefit the majority and prevent money from going to the minority shareholders. Often the majority will change how profits are distributed so that any profits are diverted to the majority through excessive salaries, bonuses, or other personal benefits—leaving nothing to be distributed to the minority shareholders in the way of dividends. In some companies where all shareholders work for the company, all corporate profits are already paid out as salary and benefits. In these instances, controlling shareholders may seek to deprive the minority shareholders of any economic benefit of their ownership by terminating the minority shareholders’ employment at the company.

The best defense against shareholder oppression is to prevent it. The best way to prevent oppression of minority shareholders is to guarantee and safeguard their rights in the corporate formation documents or other shareholder agreements. Alternatively, Illinois law provides minority shareholders who are oppressed with various statutory rights. These rights include requesting a court to set aside any action of the corporation or of its shareholders, directors, or officers; to remove an officer or director of the company; grant an accounting; or even order a buy-out of the oppressed shareholder in certain circumstances. In addition, shareholders in close corporations owe fiduciary duties to each other similar to those owed by partners in a partnership.

Our Chicago minority shareholder and LLC member attorneys have litigated minority oppression and breach of fiduciary duty lawsuits for decades.

Super Lawyers named Chicago and Oak Brook shareholder oppression Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Business Litigation, Class Action, and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago business trial lawyers have over thirty-five years of experience litigating complex shareholder oppression, minority shareholder rights, squeeze-out and freeze-out business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination, intellectual property, and trade secret lawsuits along with many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud. If you’re facing a business shareholder dispute, or the possibility of one, and you’d like to discuss how the experienced Illinois breach of fiduciary duty and shareholder oppression attorneys at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago class action attorneys and Chicago business trial lawyers, please call us toll-free at 630-333-0333 or contact us online.