What Rights Does a Minority Shareholder Have in a Small Corporation?

Imagine a corporation with three shareholders – or 10 – where a single shareholder owns a majority interest and can basically make all of the decisions for the corporation.  What does a minority shareholder do when the majority shareholder takes advantage of his power

to the detriment of the other shareholders?

The Responsibility of Shareholders

In a small or closely held corporation, controlling shareholders have a “fiduciary responsibility” to the minority and to the corporation to use their ability to control the corporation in a fair, just, and equitable manner. Majority shareholders may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.

In one case I fought for a minority shareholder, the majority shareholders “squeezed out” the minority by removing him as an officer, terminating his employment (which was his only source of income), and paying all of the corporate profits as “bonuses” to the remaining two shareholders instead of as distributions to the shareholders.  After having squeezed out my client, the majority tried to force my client to sell his shares in the corporation for a fraction of their value.

Squeezing out the minority shareholder is a common scenario in small corporations with unscrupulous majority shareholders.

Minority vs. Majority Shareholder

Well-established law in California and elsewhere prohibits majority shareholders from taking advantage of the minority.  In fact, because a majority shareholder owes fiduciary duties to the minority, the majority shareholder must actually place the interests of the minority above his own when making corporate decisions.

When the majority violates his fiduciary duties, the minority’s recourse is to file a shareholders’ derivative action against the majority, which is a lawsuit where the minority shareholder(s) sue on behalf of the corporation for any harm the majority caused to the corporation.  The proceeds from the lawsuit are paid to the corporation, which then would distribute the money to the shareholders in proportion to their ownership interests.

In addition, when the majority’s misconduct directly harms the minority, as opposed to harming the corporation itself, the minority can file a lawsuit on his own behalf.  In the above example, my client sued directly for the damages that flowed from being terminated from his employment but sued derivatively when corporate profits were wrongfully paid to the majority in the form of bonuses. I’ve handles many such lawsuits – all successfully.  Sometimes it seems to my clients like they could never prevail because the majority shareholders often have more money with which to fight the legal battle.  Yet, that’s never stopped us from getting justice.