Colorado Law Protects the Rights of Minority Shareholders
Minority shareholder protection is a key component of Colorado commercial law. If you are a minority shareholder in a “closely held corporation” in Colorado, it is important to have a complete understanding of your rights.
Burg Simpson Law Firm can help if you are facing shareholder oppression. Our attorneys are well-versed in minority shareholder protection and other disputes commonly encountered in business. Call 303-792-5595 today for a FREE and confidential case evaluation.
What Is a Minority Shareholder?
In Colorado, a shareholder is defined as follows:
“‘Shareholder’ means either the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a beneficial ownership certificate … and is on file with the corporation.”– Colorado Revised Statutes § 7-101-401(30)
A minority shareholder is any person who (a) owns less than 50% of the shares in a corporation, and (b) does not have a controlling interest in the business. In spite of this, minority shareholders have rights that are protected by law. Minority shareholder protection is especially important in closely held corporations.
What Is a Closely Held Corporation?
Per Colorado law, a closely held corporation (or, more properly, a “closely held entity”) is a business owned by no more than three people (see Colo. Rev. Stat. § 13-1-127). They are private corporations, which means their shares are not listed on any stock exchange and the shares are not actively traded by securities brokers.
Shares in closely held corporations are typically owned by members of the family behind the business and/or individuals closely connected to the firm. For a corporation to be considered “closely held,” only a minimal number of shares can be owned by outside investors.
Closely held corporations may be classified as LLCs, S corporations, or C corporations. IRS regulations state that a company providing professional services cannot be a closely held corporation.
Because closely held corporations only have a few owners, the actions of majority shareholders may have an unduly adverse effect on minority shareholders. Minority shareholders have rights, too, and it is important to understand what legal recourse you may have if your rights have been violated.
What Is Minority Shareholder Oppression?
Oppression refers to the denial or violation of a minority shareholder’s rights. This occurs when one or more majority shareholders take actions that are contrary to the best interests of the minority shareholder(s).
Examples of minority shareholder oppression include:
- Preventing access to the corporation’s books, accounting records, shareholder communications, etc.
- Withholding vital information about the company from minority shareholders
- Failure to distribute dividends fairly
- Inflating compensation for majority shareholders at the expense of minority shareholders
- Wrongful termination of a minority shareholder’s employment
- Excluding minority shareholders from management decisions, meetings of the corporation, etc.
- Barring minority shareholders from corporate property
- Trying to force a minority shareholder out of the company
Corporate officers and directors (including majority shareholders) have certain responsibilities under Colorado law. These include:
- An obligation to act in good faith
- Discharging one’s duties with the standard of care owed to all shareholders
- Acting in a manner believed “to be in the best interests of the corporation” (see Colo. Rev. Stat. § 7-108-401)
Unlike with publicly traded corporations, the majority shareholders of closely held corporations are generally considered to owe a fiduciary duty to minority shareholders (similar to the duties owed in corporate partnerships). Minority shareholders may be entitled to damages in the event of a breach of fiduciary duty.
How Are Minority Shareholders Protected in Colorado?
Minority shareholder protection is enshrined in multiple Colorado statutes. These include:
- The right to inspect and copy any corporate records (including the articles of incorporation, corporate bylaws, shareholder meeting minutes, financial statements prepared within the last 3 years, etc.) held at the principal business office, provided a written demand is issued at least five (5) business days in advance and the inspection occurs during regular business hours (see Colo. Rev. Stat. § 7-116-102(1)).
- An additional right to inspect and make copies of excerpts from board of directors and shareholder meetings, accounting records, and records containing the names and addresses of shareholders, provided the following conditions are met:
- The request must be made by the shareholder a minimum of five (5) business days before the inspection.
- Records must be reviewed at a “reasonable location stated by the corporation.”
- The shareholder has owned shares for a minimum of three (3) months
The shareholder is the owner “of at least five percent of all of the outstanding shares of any class of shares of the corporation” prior to making the demand.
- “The demand is made in good faith and for a proper purpose,” with the shareholder describing “with reasonable particularity the purpose and the records the shareholder desires to inspect” (see § 7-116-102(2)–(3)).
- The right to petition the court to order a corporation to make records available for inspection and copying (see § 7-116-104).
- Shareholders may be entitled to recovery of attorney fees, expenditures for inspection and copying of the records, and additional damages.
- The right of shareholders to commence legal proceedings to dissolve a corporation if either of the following scenarios occur:
- “(a) The corporation obtained its articles of incorporation through fraud; or
- “(b) The corporation has continued to exceed or abuse the authority conferred upon it by law.”
– Colo. Rev. Stat. § 7-114-301
In addition, shareholders have the right to be notified of the corporation’s annual meeting as well as any special meetings (see § 7-107-105). Shareholders also have the right to exercise votes in person or by proxy, with Section 7-107-203 of the Colorado Revised Statutes establishing the procedure for appointing proxies.
Finally, shareholders have the right to take legal action against a corporation when their rights have been violated (see § 7-107-402). This includes cases of minority shareholder oppression.
You May Be Entitled to Damages
Minority shareholders often feel powerless when their rights and interests are violated by those in the majority. At Burg Simpson, we help you take that power back.
The award-winning commercial litigation lawyers at Burg Simpson represent clients involved in ownership, partnership, and shareholder disputes. Our trial attorneys have the skills and experience to help you mitigate these types of business issues. If you are a shareholder or minority owner of a corporation and you have suffered due to the oppressive actions or inactions of other shareholders, you may be entitled to damages.
Contact Burg Simpson today for a FREE and confidential case evaluation. Our business and commercial lawyers are committed to minority shareholder protection, and we handle cases for clients throughout Colorado.