What Are The Rights Of Minority Shareholders In a Private Company?

Identifying Potential Breaches Of Duty By Majority Shareholders

Minority shareholders are individuals who hold less than 51% of the shares in a public or private corporation. Unfortunately, the rights of minority shareholders in private corporations are often more likely to be violated than those of minority shareholders in a public corporation, because private shares are sold differently than in public companies. On the other hand, shareholders of private companies may have access to benefits, such as flexibility in company structure and actions and more intimate knowledge of the company’s operations.

If you’re a minority shareholder of a private corporation, it’s imperative to consult with an experienced Avondale business attorney in order to understand your rights.

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What Rights Do Minority Shareholders Of a Private Company Have?

Shareholders generally hold specific rights:

The right to vote on major corporate decisions and in the election of directors
The right to participate in meetings
The right to receive dividends from company profits
The right to inspect company records that are relevant to their interests

What Are The Responsibilities Of Majority Shareholders In a Private Company?

Directors and majority shareholders hold a fiduciary duty to the corporation and minority shareholders to act in the best interests of the corporation, in compliance with the company’s governing documents, and in accordance with state and federal law. Although most majority shareholders act ethically and legally, some do not.

Some of the ways majority shareholders can breach their duty include:

Breaching the contracts that govern the operation of the corporation
Voting for unreasonable compensation for themselves
Lending money to the company at unreasonably high interest rates
Using corporate funds for their personal benefit
Making decisions that personally benefit themselves rather than the company

If you believe that a majority shareholder is acting illegally or breaching their duty, discuss the situation confidentially with your Chandler business attorney to learn more about your legal rights and next steps.

How Can I Protect My Rights As a Minority Shareholder Of a Private Company?

Before you invest in a company, take time to review the shareholder agreement to ensure that you fully understand your responsibilities and to ensure that it will protect your interests. Be sure to examine:

How many shares there are total and who owns them
Business regulations, operating agreements, and substantive rules
What issues you can vote on
How officers and directors are appointed
Rights and restrictions to participate in a competing corporation
How, when, and to whom you can sell your shares
How shares are valued
In what circumstances a majority shareholder can buy your shares

It is very likely that there will be many issues that relate to minority shareholder rights but are not familiar to you unless you are an experienced Gilbert small business lawyer. When you understand the shareholder agreement and review it with your Avondale business attorney before you complete your shares purchase, you’ll be able to proactively protect your rights as a minority shareholder.

Can a Majority Shareholder Remove a Minority Shareholder?

The relationship between majority and minority shareholders can be complicated. There are some ways that a majority shareholder may remove or pressure a minority shareholder that are not necessarily wrong or illegal. For example, they can purchase the minority shareholder’s shares according to the terms of the shareholder agreement. The majority shareholder may be able to remove a minority shareholder from the board of directors, terminate their employment, or prevent the company from doing business with them, as long as their actions do not violate the shareholder agreement or violate Arizona’s duty of good faith and fair dealing.

There are some cases where a majority shareholder can be held legally accountable for wrong actions, such as if they:

Refuse to pay dividends
Treat majority shareholders more favorably
Prevent voting, meeting participation, and other rights
Breach the shareholder agreement
Restrict access to relevant records or information
Use their majority power in bad faith, to the detriment of minority shareholders–even if they have technically followed the letter of the law in the parties’ agreements

Ask your Chandler business attorney for legal recourse options if your minority shareholder rights have been violated illegally. You may be able to bring legal action against a majority shareholder or director for fraudulent, illegal, or oppressive actions.

A number of legal remedies may be possible:

Dissolution of the business
Liquidation of business assets
Revision or cancelation of the corporation’s bylaws, articles, or other agreements
Courts orders to majority shareholders requiring them to take specific actions
An injunction that prevents majority shareholders from taking harmful actions
Awarding damages to those who were oppressed by the actions of the directors or majority shareholders

There is a two year statute of limitations for cases related to breach of fiduciary duty , breach of good faith and fair dealing, and tortious interference with contract. If you believe that your minority shareholder rights have been violated, get in touch with an experienced Gilbert business attorney right away. Cases that are pursued immediately tend to be more successful, in part because evidence and witness testimony is easier to acquire. Your attorney can help you understand your legal options and guide your next steps.

Get Help From Our Trusted Business Attorneys

The attorneys at Denton Peterson Dunn have extensive experience assisting with all types of business contract and shareholder cases in Arizona, and we are ready to use that experience to protect your rights as a minority shareholder. When you work with us, you won’t feel like a number; you’ll get immediate and consistent attention directly from your attorney and be kept up to date on what is happening with the case. Schedule your obligation-free, confidential consultation with us today.

Brad Denton, Business Lawyer
Brad Denton – Denton Peterson Dunn