Rights of Minority Shareholders in a Closely-Held Corporation - An Overview
Companies structured as corporations have multiple shareholders. The shares of these companies are held by various shareholders. Some of them are majority shareholders with more than 50% shares with vote rights in the company. However, there are minority shareholders as well. These shareholders have less than 50% shares in the company. Minority shareholders in a publicly-owned company enjoy a lot of flexibility, but those with shares in a closely-held company don’t have that much flexibility when it comes to their rights.
A closely held company is said to be a corporation with more than half of the total shares owned by a few individuals. According to a research study conducted recently states that almost 90% of companies running their businesses across the United States of America are declared as closely held corporations or simply close corporations. Generally, you will see a closely held company working as a C or S corporation. A more specific definition states that more than 50% or more shares are only owned by just 5 or fewer members. In such a corporation, the rights of minority shareholder may get compromised in such a way that it can be termed as oppression of minority shareholders.
If you happen to be a shareholder in a closely held company, you need to be fully aware of the rights given to you by US law. Here, in this righting we discuss the rights of minority shareholders in a closely held company, their protection, and the options that are available for oppressed shareholders in a closely held company. Further details are given below:
Rights of Minority Shareholders in a closely Held Corporation
In this section we will go through various rights of minority shareholders in a closely held company. These rights are given below:
A minority shareholder holds the right of inspection, however, to exercise this right the shareholder in a closely held company should notify the corporation 5 days beforehand. Moreover, the shareholder needs to justify the demand of inspection with proper reasoning.
Minority shareholder holds the right to vote in the process of selection of members in the board of directors or a manager.
He/She also holds the right of receiving dividends or profit distributions from the company if they are declared.
Options for an Oppressed Minority Shareholder:
New York Law provides minority shareholders with plenty of options if they feel any oppression or mismanagement, which may result in their loss. A minority shareholder has the right of filing an application to the tribunal for relief in case of oppression. The oppressed shareholders hold the right of requesting inspection of certain documents and other components of the operations of a business. If there is no result of doing this, oppressed shareholders may opt to bring a derivative suit against majority shareholders.
Moreover, remedies for an oppressed shareholder also include filing complaints to the tribunal. The applicant can file the application to the tribunal in case of the conduct of a company affecting its interests, its members, or any specified class of members. The tribunal may find anything unfair or prejudicial to the interests of the company or its members
In such a situation, the tribunal holds the right of issuing orders like:
Regulations regarding the conduct of the company in the future
Order members of the company to purchase the shares of a particular member who was involved in unjust conduct.
Restrictions regarding transfer and allotment of shares
Termination of the director of the company or any modification in the agreement that is found to be prejudicial against the interests of the company or any member of the company.
If all efforts of an oppressed shareholder in a closely held corporation go in vain, the last resort for such an entity is to file a derivative suit. However, before filing a derivative suit, the oppressed minority shareholder should raise concerns to the board and request for action for the remedy of the alleged harm. The oppressed shareholders have the right to effectively act on the behalf of the corporation. For this action to happen, the plaintiff must at the time of the cause of action or received from someone else by operation of law from someone who held the shares at that time.
The complaint should include the efforts of the shareholder that were used to obtain appropriate relief from the corporation. Otherwise, the complaint should state justified reasons why such efforts were not made on the behalf of the complainant. The approval of the court is required before a suit is discontinued or settled. Affected shareholders should be notified at the discretion of the court.
In case the complainant shareholder succeeds in the action or receives anything as a result of the suit, the plaintiff can be awarded reasonable expenses and attorney’s fees. The court can also direct the shareholder account to the corporation for the remainder of the proceeds. New York Law has a general rule that because shareholder derivative suit is brought on behalf of the corporation. Therefore, any recovery obtained as a result of a shareholder derivative suit will belong to the corporation. Hence, it is necessary to make sure that you hire the services of experienced business litigation attorneys that are capable of helping you out and bringing you a recovery capable of fulfilling your loss.
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While there are several rights of minority shareholders in a closely held company, it is often observed that their rights are compromised. If you are one of those minority shareholders who want to know about their rights or want to take any action against the corporation because of oppression, you need to make sure that you choose the right boutique law firm that is capable of offering you the services of experienced business litigation attorneys, such as Kleyman Law Group New York.
We have a perfect team of corporate attorneys with years of experience in settling business litigation matters. Call us or send us an email to book you appointment for consultation. You can also take our advice in other legal business matters.