Minority Shareholders – Fighting The Man
by: Richard A. Chapo
Investing in a corporate entity is fairly standard practice in our society. Problems arise when you own a small percentage of shares, but disagree with the direction the majority shareholders are taking the entity. As a minority shareholder, do you have any way to fight “the man”, to wit, the majority shareholders?
A couple of your friends come up with a great business idea, but need start-up capital. You agree to provide $10,000 for 30 percent of the shares. A corporation is formed, but the friends take the business in a direction you don’t like. What can you do?
The first step for a minority shareholder is to look at the bylaws of the corporation. If careful planning was taken when forming an entity, there should be clauses that detail your rights to object. If the corporation was formed through one of those $99 online sites, well…I wouldn’t hold out much hope. Heck, the entity may not even have bylaws!
If no relief can be found in the bylaws, a minority shareholder may be saved from themselves by their state. In every state, you will find legal codes laying out the rights of a “dissenting” shareholder. The laws are typically found in the “corporate” or “civil” codes, depending upon the state. Simply go to your local law library and ask a librarian for help.
Each state’s dissenter laws are going to be slightly different. Despite these differences, you should be able to find provisions that give a minority shareholder the right to throw a fit…err, seek justice. Generally, the dissenter rights are going to include some mechanism whereby you can force the corporation to buy back your shares.
While a “buy back” may sound great, it almost always lead to litigati...