Minority shareholders in closely held corporations often face challenges in influencing company decisions and safeguarding their investments. With limited control, they’re subject to majority shareholder or executive decisions, which can sometimes lead to oppressive practices. However, New York law provides protections that grant minority shareholders some oversight and, in certain cases, legal remedies to protect their interests.
In this post, we’ll cover the basic rights of minority shareholders in New York, shareholder oppression remedies, and why you should work with an experienced business lawyer to protect and enforce those rights.
What is a Minority Shareholder?
A minority shareholder is any shareholder who owns less than 51% of a company’s voting shares. This means they don’t have control of the company and therefore don’t have the power to make major business decisions on their own. Minority shareholders might own a few shares or almost a majority but don’t have the authority that comes with having a majority.
Challenges for Minority Shareholders
Without control, minority shareholders are subject to decisions made by the controlling shareholders or directors and have limited governance rights. Minority shareholders lack statutory or common law rights that guarantee them equal participation or protection against majority shareholders’ decisions. This lack of control can lead to minority shareholders being ignored or harmed. For example, if dividends are withheld or corporate decisions reduce the value of their shares, minority shareholders may be financially harmed beyond their control.
Minority Shareholders in Public vs. Private Companies
Minority shareholders exist in public and private companies, but their experience can differ depending on the company structure. The majority of owners in closely held corporations hold full control and decision-making power, which can significantly impact the rights and experiences of minority shareholders. In public companies, shareholders have more protections under federal securities laws, including regular disclosures and the right to attend shareholder meetings.
In private companies, protections are governed by state law and shareholder agreements. This can mean private minority shareholders have more challenges, especially around transparency and access to information.
Basic Rights of Minority Shareholders in New York
In New York, minority shareholders have certain rights to protect their interests within a company even though they may not have control over major decisions. Here’s what they are.
Right to Vote on Major Company Decisions
While minority shareholders may not have the power to make daily decisions, they do have the right to vote on big company decisions. These include voting for the board of directors, approving mergers, and changes to the company’s certificate of incorporation. This voting power may be limited, but it’s a voice in decisions that can impact the company’s structure and value.
Right to See Corporate Records
New York law gives minority shareholders the right to access and inspect certain corporate records, such as financial statements, board minutes, and shareholder meeting records. This transparency in records for minority shareholders is crucial for protecting their rights and ensuring they can participate in key decisions. To access these records, a shareholder must show a “proper purpose”—usually a legitimate interest related to their role and investment in the company. This right to inspect helps minority shareholders stay informed and see if the company is being run in their best interests.
Right to Dividends
Minority shareholders are entitled to receive dividends when the board declares them as long as they own shares that are dividend-eligible. Directors have the discretion to declare dividends but can’t withhold them in bad faith. If dividends are withheld unfairly, it may be a breach of fiduciary duty and grounds for minority shareholders to sue.
Right to Shareholder Protection from Dilution
In New York, minority shareholders may have preemptive rights to buy additional shares before the company issues new shares. These rights are designed to protect shareholders from dilution of their ownership percentage and are often set forth in the company’s certificate of incorporation or shareholder agreements. By exercising these rights, minority shareholders can maintain their percentage ownership in the company.
Right to Bring Derivative Actions
Minority shareholders in New York can also bring derivative actions — lawsuits on behalf of the company when directors or majority shareholders breach their fiduciary duties. When management is harming the company and majority shareholders won’t act, minority shareholders can bring these lawsuits. Derivative actions help protect the company and provide a remedy when majority shareholders won’t act responsibly.
Remedies for Minority Shareholder Oppression
New York law gives minority shareholders several remedies if they are oppressed or mistreated by majority shareholders. Here’s where to go.
Involuntary Dissolution Petition
The most powerful remedy for minority shareholders is the right to petition for involuntary dissolution. In New York, a minority shareholder can petition for dissolution if directors or shareholders are deadlocked so that the company can’t be managed or if those in control are engaging in illegal, fraudulent, or oppressive conduct towards minority shareholders.
While dissolution is a big remedy, it can be effective in cases of extreme mistreatment or irreparable corporate dysfunction.
Direct and Derivative Lawsuits
Minority shareholders can also sue majority shareholders or directors directly if their personal shareholder rights are violated. This could be if dividends are withheld unfairly or access to records is denied unfairly. In some states, there is legal recourse available for minority shareholders facing oppression by majority shareholders, who may engage in tactics to freeze out or oppress minority shareholders.
Minority shareholders can also bring derivative lawsuits on behalf of the company if majority shareholders or directors are harming the company itself, such as through mismanagement or breach of fiduciary duty. Derivative suits help protect the company and provide a remedy when those in control misbehave.
Injunctive Relief and Damages
In cases of oppression, New York courts can grant injunctive relief to stop further harm by majority shareholders. For example, the court might issue an injunction to stop unfair decisions that benefit majority shareholders at the expense of minority interests.
In some cases, the court may also award damages to minority shareholders for losses they suffered as a result of oppressive conduct. Injunctive relief and damages provide an immediate remedy to protect minority shareholders’ interests and compensate them for the harm.
Buyout
A buyout can also be a remedy where the court orders majority shareholders to buy back minority shareholders’ shares at fair value. This is often used when oppression is so severe that it’s impractical for minority shareholders to remain in the company. Buyouts allow minority shareholders to exit the company on fair terms if they can’t sell their shares on the open market.
Best Practices For Minority Shareholders
To protect themselves, minority shareholders should adopt practices that will help them understand the company better and protect their rights. Here are some to consider.
Read the Shareholder Agreement Carefully
Before investing, minority shareholders should read the shareholder agreement and other governing documents carefully. This agreement will outline key information on voting rights, dividend policies, share transfer restrictions, and governance procedures. Reading this will help shareholders know their level of control and what the limitations are on decision making.
Keep an Eye on the Company’s Performance
Staying up to date on the company’s financials and operations is crucial. The actions and influence of a majority shareholder can significantly impact the company’s performance, either supporting or oppressing minority shareholders. Reading financials and attending shareholder meetings will help minority shareholders stay aware of any issues that may impact their investment. Keeping an eye on performance will allow shareholders to spot problems such as unusual financial practices or management conflicts of interest.
Demand Access to Records
If needed, minority shareholders should not be afraid to exercise their right to inspect company records. Access to financials, tax returns, and meeting minutes will allow shareholders to verify the company is transparent and following its bylaws. Properly using this right will provide some level of oversight and ensure shareholder interests are respected.
Team up with Other Shareholders
In some cases, it can be beneficial for minority shareholders to team up with other shareholders. Aligning with other investors who have similar concerns will strengthen their influence on company decisions, especially in voting matters or when addressing corporate governance issues. This informal coalition will also provide additional support if minority shareholders need to take legal action.
Get Legal Help When Needed
With the complexity of corporate governance laws, minority shareholders should get legal advice if they suspect rights are being violated or think there will be issues. It is crucial to understand and protect minority shareholders rights to prevent shareholder oppression and ensure legal avenues for redress are available. An experienced lawyer can help with shareholder agreements, interpret corporate bylaws, and advise on remedies when shareholder rights are being infringed. Legal help is especially useful in disputes or complex situations with majority shareholders.
Consult With an Experienced Westchester Business Law Attorney ASAP!
If you’re a minority shareholder seeking to protect your rights or facing challenges within your corporation, our team at Rosenbaum & Taylor, P.C. is here to help. With extensive experience in New York business law, we provide the guidance and support needed to navigate complex corporate matters and ensure your interests are safeguarded.
Contact us at [phone] for a free case consultation today!