Protecting Your Rights as a Minority Shareholder

It is not uncommon for a minority shareholder to feel as though a company they own stock in is being managed in a way that is not in their best interest. Typical claims that minority shareholders often make against corporations include several years of failing to make profit distributions, lack of access to information, failure to hold an annual meeting of shareholders, or a failure to produce meeting minutes. Overall, minority shareholders often engage our firm when they feel as though they are either being ignored or effectively forced out of the operation of the business that they helped create with their investment and effort. Despite the inherent voting disadvantages of being a minority shareholder, there are certain protections in place to help minority shareholders protect their investments.

One red flag to be aware of, as noted above, is a lack of profit distributions. This is not always a problem because there are some businesses that state from the outset that they do not plan to issue any profit distributions but instead intend to pay down debt or increase the value of the business to the point in which it can be sold. At that point, all of the shareholders in the business would be able to take advantage of the increase in value of their shares. However, if this is not the corporation’s stated goal, then it is a fair question to ask why profit distributions have not been paid to the shareholders, especially if it has been several years in a row and there is evidence that the company is profitable. 

What can you do? 

The Illinois Business Corporation Act allows all shareholders to review the books and records of a company so long as they provide written notice to the corporation with a clearly stated purpose. Whether a shareholder’s purpose is legitimate may be a source of debate between the shareholder and the corporation. If a corporation refuses to allow a shareholder to inspect books and records after proper notice, the shareholder may petition a court in its jurisdiction to require the corporation to turn over the particular records. Litigation on these matters can be successful, but it is often costly and should be avoided with some preventative measures. 

In the event that you are considering purchasing a minority interest in a privately-owned company, the best time to secure your rights in a more thorough manner is at the very beginning of the investment. It is at this point in time when the shareholder has the most leverage and the company will be most willing to make changes and enter into agreements that benefit the shareholder because they are interested in securing an investment. One of the most important documents that a new investor can enter into would be a shareholder agreement. A shareholder agreement can control corporate procedures such as how profits are paid and when they are paid, and can even require that certain minimum profit distributions be made on an annual or quarterly basis. Certain provisions can even control who will be on the board of directors and who will be appointed as officers. Further, operational issues such as controlling how major purchasing decisions are made over a certain dollar amount can be controlled through a shareholder agreement. Once an investment is made, it is generally difficult to make a corporation entertain requests or demands for more protection because at this point, the corporation’s agents only have a duty to act in the best interest of the shareholders, which is a relatively low standard.

Conclusion

In conclusion, if you are a minority shareholder and wish to learn more about your rights under general corporate law or if you are considering making an investment as a minority interest owner in a small privately-owned business, please do not hesitate to contact attorney Frank Portera at 847-705-7555 or fportera@lavellelaw.com.