Last Updated on December 18, 2022 by Anda Malescu
In the United States, minority shareholder rights fall under the law of the state in which the corporation was formed
Practically, it means that if the company was incorporated in Florida for example, the rights of the minority shareholders are defined by Florida law. However, some basic minority shareholder rights are applicable in all, or most, states.
Now, every corporation no matter how big or small, has shareholders. Whether the corporation is listed on the stock exchange and therefore a publicly traded corporation or is simply owned by a small group of private investors (known as a privately held corporation or a closely held corporation) without trading on an exchange, it still has shareholders.
In fact, most businesses in the United States operate as “privately held” companies and they can be of any size – from small family-owned businesses to large multi-national corporations. For example, the Publix Super Market which is headquartered in Florida and had a revenue of 35 billion dollars in 2017 is a private corporation wholly owned by present and past employees and members of the Jenkins family (ie. Publix shareholders).
In corporations with shares bought and sold on a public stock exchange, shareholders can easily sell their shares
Shareholders of public corporations can sell their stock literally on a moment’s notice at the market price. However, this is not the case with shareholders of privately held corporations. In closed corporations, shareholders do not have an open market for their shares and as a result they cannot simply sell their shares for fair market value on a moment’s notice. Because it is not easy for shareholders of closely held corporations to sell the shares anytime they are dissatisfied with the leadership or other shareholders, it is important for minority shareholders to know their rights.
As it can be seen, whether a corporation is private has ramification on the relationship between those who hold the majority of the close corporation’s stock and exercise control (majority shareholders), and those who only have less than 50% of company’s stock and cannot exercise control (minority shareholders). Without laws to protect minority shareholders in closely held corporations and grant them certain basic rights and protections, the minority shareholders are vulnerable to oppressive actions of the controlling shareholders and have no ability to sell their shares quickly and protect their investment.
The minority shareholder rights widely recognized in most U.S. states are as follows:
- Right to Access Corporate Books and Records. Minority shareholders like every shareholder have the right to attend the company’s meetings, vote the shares and inspect the company’s books and records. Typically, in order to review the company’s records, the shareholder must send a demand in writing to the corporation and state the purpose of the inspection. Some of the records shareholders can review include financial statements, minutes of shareholder and board of director meetings, accounting records and other information.
- Right to Benefit from Shareholdings. Minority shareholders have the right to benefit from the company’s operations and receive dividends and sell shares for a profit. However, in practice these rights can be restricted by those in control of the corporations. For example, the board of directors can decide to not pay dividends or purchase shares from shareholders. If a minority shareholder believes that a majority shareholder is suppressing minority shareholder rights, it is recommended to consult an attorney.
- Minority Discount. When a private corporation values its shares to prepare for a sale or transfer of ownership, the company assigns a minority discount to the minority shares. The discount on minority shares reflects the fact that the minority shares are not as valuable because they do not provide ability to exercise control over the corporation.
- Majority shareholders owe fiduciary duty. In most states, majority shareholders owe fiduciary duties to minority shareholders including duty of care and duty of loyalty. In practical terms this means that the majority shareholder must act in good faith and treat the minority shareholders with fairness, loyalty and honesty. Minority shareholders have the right to expect company’s officers and directors to act in the company’s best interest and in compliance with the terms of the shareholders agreement. A typical example of how majority shareholders can injure minority shareholders is when they form a parallel company to compete directly with the corporation. However, minority shareholders can question the decisions of the corporate officers and directors and majority shareholders and file a shareholder derivative suit and other kinds of lawsuits.
Taking steps to protect your rights as a minority shareholder is important. Contact us or schedule a consultation with your business attorney in Miami, Florida USA to protect your rights and your financial interests.
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