Why Do Some Shareholders Feel the Need to Oppress Their Minority Stakeholders?

HNWShareholder Rights Litigation

shareholderControlling shareholders are in a position to abuse their power over minority shareholders by reducing or eliminating one or more economic benefits of ownership to the minority, by systematically violating the rights associated with share ownership, and otherwise by defeating the normal expectations of shareholders relating to the ownership of their shares. This conduct takes many forms and appears in many different factual situations. When times are good and the corporation is growing, the majority may act to seize a greater percentage of the corporate profits for themselves at the minority’s expense.  When times are bad, the majority may act to preserve for themselves a greater piece of the shrinking pie at the expense of the minority.  Sometimes, a majority wants to get rid of minority ownership positions.  The actions of the majority may be motivated by greed or by a perception (valid or not) that the minority owner is not contributing his or her fair share. Often, the motivation for oppressive conduct stems from personal conflict among the majority and minority shareholders.

Such oppressive conduct may act to “squeeze out” a minority shareholder, forcing that shareholder to leave the corporation and sell his shares usually at an unfairly low price, or to “freeze out” the minority shareholder by structuring corporate governance and distribution of economic benefits so as to render the minority shareholder’s ownership essentially irrelevant. In either a freeze-out scenario or a squeeze-out attempt, the majority typically cuts off the minority shareholders from information about the corporation and from any participation in management. The majority will frequently manipulate the finances of the corporation so that profits are not distributed as dividends but rather are diverted to the majority through excessive salaries, bonuses, or other personal benefits. When all of the shareholders work in the corporation and all corporate profits are paid out as salary and personal benefits, the majority will often terminate the minority shareholder’s employment (and thus cut off all economic benefits from stock ownership). The Supreme Court acknowledged that minority shareholders in closely-held corporations have no statutory right to exit the venture and receive a return of capital.

To discuss your NJ shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Shareholder Attorney

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