Minority Shareholder Oppression: What Minority Shareholders, Partners and Members Need to Know About Their "Fiduciary" Rights
Acts of Minority Shareholder, Member, and Partner Oppression
As a minority shareholder, member or partner, the time has probably come where you are faced with a threat to your business investment and possible livelihood. The threat comes from your "partners" and most likely revolves around the fact that they either want you out of the business or they want to minimize distributions to you. To achieve this "improper goal," the majority will more likely than not engage in actions that are designed to negate and minimize your rights as an equity holder. That is, your majority partners, under the pretext of attending to legitimate business tasks, will engage in "acts of oppression."
Examples of Oppressive Actions Include:
- Withholding Distributions: withholding distributions to minority or all equity holders,
- Disproportionate Compensation: establishing disproportionate compensations structures favoring the majority equity holders who are also officers,
- Denied Access to Books and Records: denying minority equity holder access to books and records;
- Lock-Out: lock-out of a minority equity holder under the pre-text of some wrongful act;
- Diverted Business Assets: diversion of business assets or business opportunities to a new entity controlled by the majority.
Shareholder and Partner Oppression Comes in Many Forms
Keep in mind that actions of minority shareholder oppression take many forms and are not necessarily clear cut. Actions of minority oppression are typically undertaken under the cover or pretext of legitimate corporate action, but in the end are designed for one purpose: squeeze you out as a minority shareholder and to do this by denying you the benefits of your equity and ownership interests.
Involved in a dispute? We recommend reading:
"The New York and New Jersey Partnership Dispute Guide"
Fiduciary Rights - Your Primary Tool for Fighting Off Acts of Oppression
In both New York and New Jersey there are various "statutory" laws that come into play for the protection of minority equity holders. I have discussed these important statutory rights in numerous articles (See, links below) and in my book "The Partnership Dispute Guide." However, in this article, my goal is to emphasize and make you aware of the the critical "fiduciary rights" that may be afforded to you (as a minority equity holder) under both New York and New Jersey law.
Under New York and New Jersey law, all minority shareholders, members and partners are owed a duty of good faith and loyalty from the majority members. That is, the majority (in managing and controlling voting decisions) must act for the best interests of the business and not the interests of any shareholder group. Decisions must possess a legitimate business purpose and they must be undertaken for the purpose of benefiting the business and not distributions to the majority. Keep in mind that although the majority may technically be authorized to vote on a particular issue, the majority may nevertheless be violating the fiduciary duties owed to you.
As a minority equity holder, it is critical to understand that you have legal options and remedies that go beyond the terms of your shareholder, member or partner operating agreement.
A Proven Course of Action to Protect Your Rights as a Shareholder and Partner
If you are a "minority" shareholder or partner - even if you are an equal owner of the business - and you lack or are losing control over the business and your partner or partners are locking you out or slowly freezing out your ownership interests (i.e., no distributions, termination of your employment or denied access), it is critical to understand that you possess significant legal rights that go beyond any shareholder or partnership agreement and that with a proactive plan and course of action (i.e., not the typical attorney letter) you can stabilize and protect your ownership interests and rebalance the negotiating playing field.
- ORDER: a complimentary copy of Charles N. Internicola's book "The Partnership Dispute Guide".
- CONTACT: Mr. Internicola, Esq's staff at 800.976.4904 or by email, to learn more about our services and how we assist shareholders and partners when faced with a serious dispute.