Shareholder oppression
Encyclopedia
Shareholder oppression occurs when the majority shareholders in a corporation
take action that unfairly prejudices the minority. It most commonly occurs in close corporations, because the lack of a public market for shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. The majority shareholders may harm the economic interests of the minority by refusing to declare dividend
s or attempting a squeezeout. The majority may physically lock the minority out of the corporate premises and even deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them. An important concept in law pertaining to shareholder oppression is the "reasonable expectations" of the minority shareholder. The "fair dealing
" standard is also sometimes used by courts.
The potential for shareholder oppression arguably increased when corporate law
was changed to eliminate the common law
right of minority shareholders to veto fundamental corporate changes such as mergers. It has been said that the business judgment rule
and notions of majority rule
have allowed shareholder majorities to use the minority's investment without paying for it. It has also been said, however, that it is difficult to determine how to deal with the rights of the minority shareholder without destroying the corporation, while still respecting the rights of the majority shareholder.
The courts sometimes make oppression remedies available. An oppressed minority shareholder can ask the court to dissolve the corporation or to hold the corporation's leaders accountable for their fiduciary responsibilities. Another remedy sometimes used is court-ordered purchase of shares. As of 1997, the European Union
still had not harmonized laws for dealing with shareholder oppression. In the United Kingdom
, the Companies Act 1985
governs remedies for minority shareholder oppression. Contractual protections, such as buyout provisions in a shareholder agreement, have cited as a potential alternative to statutory protections of minority shareholders.
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
take action that unfairly prejudices the minority. It most commonly occurs in close corporations, because the lack of a public market for shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. The majority shareholders may harm the economic interests of the minority by refusing to declare dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s or attempting a squeezeout. The majority may physically lock the minority out of the corporate premises and even deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them. An important concept in law pertaining to shareholder oppression is the "reasonable expectations" of the minority shareholder. The "fair dealing
Fair dealing
Fair dealing is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work, which is found in many of the common law jurisdictions of the Commonwealth of Nations....
" standard is also sometimes used by courts.
The potential for shareholder oppression arguably increased when corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
was changed to eliminate the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
right of minority shareholders to veto fundamental corporate changes such as mergers. It has been said that the business judgment rule
Business judgment rule
The business judgment rule is a US case law-derived concept in corporations law whereby the "directors of a corporation . . . are clothed with [the] presumption, which the law accords to them, of being [motivated] in their conduct by a bona fide regard for the interests of the corporation whose...
and notions of majority rule
Majority rule
Majority rule is a decision rule that selects alternatives which have a majority, that is, more than half the votes. It is the binary decision rule used most often in influential decision-making bodies, including the legislatures of democratic nations...
have allowed shareholder majorities to use the minority's investment without paying for it. It has also been said, however, that it is difficult to determine how to deal with the rights of the minority shareholder without destroying the corporation, while still respecting the rights of the majority shareholder.
The courts sometimes make oppression remedies available. An oppressed minority shareholder can ask the court to dissolve the corporation or to hold the corporation's leaders accountable for their fiduciary responsibilities. Another remedy sometimes used is court-ordered purchase of shares. As of 1997, the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
still had not harmonized laws for dealing with shareholder oppression. In the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, the Companies Act 1985
Companies Act 1985
The Companies Act 1985 is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries.The Act was a consolidation of...
governs remedies for minority shareholder oppression. Contractual protections, such as buyout provisions in a shareholder agreement, have cited as a potential alternative to statutory protections of minority shareholders.