Shareholder Oppression: Understand Your Rights

Your position as a shareholder means a lot to you, even if you only own a minority share. Unfortunately, the majority owners could see your position differently, and might not welcome your participation in company affairs. You should have a voice, but the majority shareholders simply prefer doing things their way. This is shareholder oppression. This article will help you better understand your rights as a minority shareholder under Colorado law.

In This Guide:

• What Rights Do Shareholders Have?
• What Amounts to Minority Shareholder Oppression?
• What Rights Do Minority Shareholders Have?
• What Damages Can I Recover as an Oppressed Minority Shareholder?

What Rights Do Shareholders Have? 

All shareholders in a company have rights and abilities. Generally, they include the:

1. ability to vote to remove directors
2. right to attend a shareholders’ meeting
3. ability to exercise certain auditing rights

These rights are sometimes limited for minority shareholders, as their influence is based on the number of shares they hold. This creates the risk of minority shareholder oppression, which is the tendency for majority shareholders to abuse their powers to the detriment of the minority.

For example, majority owners can become greedy, steering the company by decisions that benefit only them — often harming the company as a whole, or its minority owners. Majority shareholders may take unnecessary risks since their majority status protects them from punishment.

What is a Company Shareholder?

A shareholder is a person or institution that owns at least one share of a company’s stock or mutual fund. Shareholders essentially own the company, which comes with certain rights, responsibilities, and rewards when the company is doing well. For example, a shareholder in a successful company can earn income from dividend payments.

• Minority shareholders own less than 50 percent of the company’s overall shares. They generally do not have voting control of the company, nor can they singlehandedly elect directors to the board. They receive a share of ownership in return for their investment in the company. Their shares can increase in value as the company grows, as long as their rights are protected.
• Majority shareholders control more than 50 percent of a company’s overall shares. They tend to be the founders or, in older, more established companies, are related to the original founders. Majority shareholders always have control over the management, board of directors, and company.

Because majority shareholders wield such influence over a company’s direction, Colorado law requires that corporate officers and directors adhere to certain standards.

A Fiduciary Duty of Loyalty 

Officers and directors have a duty to act in the best interest of the corporation and all of its shareholders. They may not oppress the rights of minority shareholders. That means they may not benefit at the expense —or to the exclusion— of the rights of minority owners. Colorado Revised Statutes 7-108-401 

The statutory language only says that directors and officers must act in the interest of all shareholders to benefit the whole company.

In reality, however, the actions of the company tend to be dictated by the majority shareholders. They have the power to appoint or remove officers who manage the day to day operations of the business, and do not expect much input from minority owners.

What Amounts to Minority Shareholder Oppression? 

The Colorado General Assembly has not statutorily defined what specific conduct constitutes oppression, however, the courts have spoken in a few cases and defined it as:

“Burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of the company to the prejudice of some of its members; or a … departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Polk v. Hergert Land & Cattle Co., (Colo. Ct. App. 2000) 

Also, deciding whether oppressive actions have occurred “requires consideration of the reasonable expectations of minority shareholders” including expectation that the controlling interest will comply with the law and “promote the purpose of the corporation.” Colt v. Mt. Princeton Trout Club, Inc., (Colo. Ct. App. 2003). 

What Rights Do Minority Shareholders Have?

Without legal protection, a minority shareholder’s investment and expectations are subject to the whims of majority shareholders. Colorado law protects all shareholders and safeguards the interests of minority shareholders.

Shareholder rights include, but are not limited to:

• The corporation shall provide them with accurate information
• Shareholders shall be informed of the sale of substantial corporate assets
• The corporation shall act to promote the purpose of the corporation
• The corporation shall not take actions benefiting a group of shareholders at the expense of another group of shareholders
• Shareholders must be informed of material information (good or bad) when entering a transaction with the corporation
• Shareholders shall receive a fair price for their shares

— Colorado Revised Statutes, Title VII, Articles 107 to 108

These protections prevent a minority shareholder’s investment and expectations from being harmed by those in control of the corporation.

Protecting Minority Shareholders in Closely Held Corporations

The rights listed above are heightened when it comes to closely held corporations; companies owned exclusively by a closed, smaller group of individuals.

Such ownership groups are often made up of early investors, old friends, family members, and/or longstanding employees who might not have the expertise of a larger corporation’s elected board of directors. Therefore, conflicts can be common and are often quite disruptive.

Controlling shareholders in a closely held corporation are like partners in a partnership. They owe the highest degree of loyalty and trust, must exercise good faith in their decisions, and may not use their power to harm the other shareholders.

What Damages Can I Recover as an Oppressed Minority Shareholder? 

Minority shareholders can obtain a range of remedies, depending on the type of legal action they bring against a company’s officers and majority shareholders.

For example, in a breach of trust or fiduciary loyalty lawsuit, a successful lawsuit by minority shareholders can result in one or more of the following actions:

• the appointment or removal of directors or officers,
• payment of owed dividends,
• ordering an accounting,
• appointment of a custodian to manage the corporation temporarily,
• purchase of the shares of the minority shareholder,
• or dissolution and liquidation of the corporation (hyperlink 4)

Derivative Actions for the Company 

Many cases brought against controlling shareholders by the minority belong not to any individual owner, but to the company itself. If this is the case, then the shareholders can bring a “derivative action” in the name of the company for the requested relief. Derivative lawsuits carry their own sets of rules, so it’s important to speak with a commercial or business litigation attorney to determine possible remedies and causes of action before filing suit.

Have Your Rights Not Been Respected? Talk to a Commercial Litigation Attorney

Ownership, partnership, and shareholder disputes can be stressful and costly. If you are a minority shareholder of a corporation and have suffered damages by others within the corporation, or by the corporation itself, the Commercial Litigation team at Robinson & Henry can help. 

Our attorneys have formidable experience in protecting shareholder rights, and have helped obtain recovery of damages for shareholders who have already been adversely affected by corporate oppression. Stand up for yourself as a minority shareholder. Call 303-688-0944 for your case assessment.