Partnership Disputes: Protection for Oppressed Minority Shareholders

Minority Shareholder Rights: Protection from Oppression
Many times when I am contacted and consulted by a minority shareholder, partner or member (someone who controls less than 50% equity interest) for advice and a plan for dealing with a lock-out or a majority intent on squeezing the value of out of the minority, is a genuine concern about either a onerous shareholder agreement (one where the majority controls) or the simple fact that he or she, as a minority shareholder, may be "out voted".  Basically, minority shareholders are concerned that their non-controlling interest or onerous shareholder agreement will, effectively, render their equity interest worthless.

While the concern that I have described exists for good reason, minority shareholders need to know, beware of and discuss with his or her shareholder attorney, the "fiduciary rights and obligations that are due to minority shareholders and how these rights may be used to fight off oppressive acts. Here are some factors to consider:

• Acts of Oppression - Acts of oppression come in many forms and are, generally, (i) actions taken by the majority or controlling shareholders that, (ii) appear to be legal or, at least, consistent with the technical terms of the shareholder agreement / law but (iii) in actuality, are actions that are taken to simply, deny minority shareholders the rights and value associated with their shares.  Examples include the diversion of funds through alternate forms of compensation to the majority and refusing to issue distributions.

• How to Minority Shareholders Must Fight Back the Majority -  There are many courses of action that a minority shareholder may adopt but the one that is the topic of this article relates to the fiduciary duties and obligations that exist between all shareholders.  That is, under New York law the courts impose on all shareholders, partners and members a fiduciary duty.  This fiduciary duty requires that with regard to the corporate entity the shareholders / partners act in good faith and to deal fairly with one another.  With regard to minority shareholders this fiduciary duty requires that the majority not engage in oppressive actions.  That is, the majority must act in good faith and not for the purpose of harming the minority - even if the majority's actions appear to be technically permitted by a shareholder agreement or otherwise.