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| Protecting the Rights of Business Owners |
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What Is the Buy-Out Remedy?
When those in control of the company violate a shareholders' rights to the degree that share ownership in the
company can become essentially worthless or meaningless, then the courts can order the controlling
shareholder to pay for what he has essentially already stolen. The the court orders a buy-out, then the court
will determine the price. The law requires a "fair price." Generally, the jury determines what a fair price would
be based on expert testimony from each side.
When those in control of the company violate a shareholders' rights to the degree that share ownership in the
company can become essentially worthless or meaningless, then the courts can order the controlling
shareholder to pay for what he has essentially already stolen. The the court orders a buy-out, then the court
will determine the price. The law requires a "fair price." Generally, the jury determines what a fair price would
be based on expert testimony from each side.
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What Is a Derivative Suit?
When bad conduct of directors or controlling shareholders harms the corporation, and is not just directed at a
particular shareholder, such as by waste, mismanagement, misappropriation, excessive compensation,
self-dealing transactions, or usurping corporate opportunities, then all the shareholders suffer equally from the
damage to the corporation, and the right to sue for this type of wrong-doing belongs to the corporation, not to
the shareholders. However, the people who are stealing from the corporation usually are the very same ones
who are running the corporation, and they are not going to sue themselves. Therefore, the law provides a
special procedure in which a shareholder can file a lawsuit against the directors and controlling shareholders
on behalf of the corporation. Although the recovery technically belongs to the corporation, there is a
procedure that allows the court to pay the damages directly to the innocent shareholders, which prevents the
guilty ones from benefiting and eliminates the problem of double taxation of the damages.
When bad conduct of directors or controlling shareholders harms the corporation, and is not just directed at a
particular shareholder, such as by waste, mismanagement, misappropriation, excessive compensation,
self-dealing transactions, or usurping corporate opportunities, then all the shareholders suffer equally from the
damage to the corporation, and the right to sue for this type of wrong-doing belongs to the corporation, not to
the shareholders. However, the people who are stealing from the corporation usually are the very same ones
who are running the corporation, and they are not going to sue themselves. Therefore, the law provides a
special procedure in which a shareholder can file a lawsuit against the directors and controlling shareholders
on behalf of the corporation. Although the recovery technically belongs to the corporation, there is a
procedure that allows the court to pay the damages directly to the innocent shareholders, which prevents the
guilty ones from benefiting and eliminates the problem of double taxation of the damages.
What Rights Do Shareholders Have?
By law, shareholders have the right to have their shares registered and acknowledged by the company, to vote
at annual shareholders' meetings for directors and on other matters brought before the shareholders, to attend
annual and any special meetings where shareholders may confront directors and demand information, to have
reasonable access to important information about the corporation, including the right to an annual financial
statement upon request and the right to inspect the books and records of the corporation. Shareholders have a
right to have their share interests treated equally with all other shares of the same class--same voting rights per
share, same dividends per share. In closely held corporations, shareholders may have additional rights
depending on the particular situation and express or implied agreements among the shareholders. Courts will
protect a shareholder's "reasonable expectations." For example, if the shareholders set up the corporation so
that all the shareholders were employed by the corporation, all profits were to be distributed solely as salary,
and all shareholders participated in management of the company, then those shareholders might have a
"reasonable expectation" of being employed so long as they owned their shares. There is no right to dividends
per se. Courts generally respect the discretion of the directors in deciding whether to distribute profits or keep
them in the business, but courts also protect the rights of shareholders to some form of financial return on
investment. If the controlling shareholders structure the company's finances so that some shareholders benefit
economically from the corporation but others do not, then courts will recognize a violation of the shareholders'
rights. Finally, shareholders have the right to be treated with good faith and honesty by the directors and
controlling shareholders.
By law, shareholders have the right to have their shares registered and acknowledged by the company, to vote
at annual shareholders' meetings for directors and on other matters brought before the shareholders, to attend
annual and any special meetings where shareholders may confront directors and demand information, to have
reasonable access to important information about the corporation, including the right to an annual financial
statement upon request and the right to inspect the books and records of the corporation. Shareholders have a
right to have their share interests treated equally with all other shares of the same class--same voting rights per
share, same dividends per share. In closely held corporations, shareholders may have additional rights
depending on the particular situation and express or implied agreements among the shareholders. Courts will
protect a shareholder's "reasonable expectations." For example, if the shareholders set up the corporation so
that all the shareholders were employed by the corporation, all profits were to be distributed solely as salary,
and all shareholders participated in management of the company, then those shareholders might have a
"reasonable expectation" of being employed so long as they owned their shares. There is no right to dividends
per se. Courts generally respect the discretion of the directors in deciding whether to distribute profits or keep
them in the business, but courts also protect the rights of shareholders to some form of financial return on
investment. If the controlling shareholders structure the company's finances so that some shareholders benefit
economically from the corporation but others do not, then courts will recognize a violation of the shareholders'
rights. Finally, shareholders have the right to be treated with good faith and honesty by the directors and
controlling shareholders.
What Is Shareholder Oppression?
Shareholders in large corporations usually do not have to worry about their individual rights. Shareholder
relations in publicly traded corporations are closely regulated by the SEC and the individual exchanges.
Furthermore, such shareholders usually don't have any personal contact with the management, and the
shareholder can always sell the shares on the open market. Not so in small, closely-held corporation.
Shareholders of these corporations do interact with management and are always at risk of retaliation based on
personal animosity. Shareholders in small corporations usually cannot sell their shares. Therefore, minority
shareholders in these corporations are trapped and dependent on the good graces of those with voting control.
When majority shareholders act to take advantage of this situation and harm the interests of the minority
shareholders, such conduct is called "oppression." Oppressive conduct involves a pattern of repeated
violations of the shareholder's rights. Often this conduct is designed to "squeeze out" a minority
shareholder--force her to sell her shares, usually at an unfairly low price. Also the controlling shareholder will
sometimes "freeze out" the minority shareholder by denying her information, economic return, or even
acknowledgement of her share ownership.
Shareholders in large corporations usually do not have to worry about their individual rights. Shareholder
relations in publicly traded corporations are closely regulated by the SEC and the individual exchanges.
Furthermore, such shareholders usually don't have any personal contact with the management, and the
shareholder can always sell the shares on the open market. Not so in small, closely-held corporation.
Shareholders of these corporations do interact with management and are always at risk of retaliation based on
personal animosity. Shareholders in small corporations usually cannot sell their shares. Therefore, minority
shareholders in these corporations are trapped and dependent on the good graces of those with voting control.
When majority shareholders act to take advantage of this situation and harm the interests of the minority
shareholders, such conduct is called "oppression." Oppressive conduct involves a pattern of repeated
violations of the shareholder's rights. Often this conduct is designed to "squeeze out" a minority
shareholder--force her to sell her shares, usually at an unfairly low price. Also the controlling shareholder will
sometimes "freeze out" the minority shareholder by denying her information, economic return, or even
acknowledgement of her share ownership.