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Minority Shareholders Have Rights, Too

October 4, 2017 | 3 min read

By definition, minority shareholders do not have much say in how a company is run. They are a lot like Delaware in a presidential election. But the law does afford them protections to prevent their rights from being trampled, while also granting remedies in case those rights have been violated.

Minority shareholder rights are violated when the majority of shareholders behave in such a way that is contrary to a shareholder’s expectation that existed when he decided to purchase stock in the first place. This is magnified in a closely held corporation, where the duty of the controlling parties is similar to those of the parties in a partnership. The majority has the highest responsibility to act in good faith, and must not act in any way that harms other shareholders. Similarly, majority shareholders should not benefit at the expense exclusion of the minority shareholders.

If you are a minority shareholder and you believe your rights have been violated, speak to a corporate litigation attorney as soon as possible.

Shareholders Unfriend Facebook Founder

The legal battle Facebook founder Mark Zuckerberg faces right now over the future of his company is an excellent example of how shareholder rights can be threatened.

In April 2016, Facebook executives announced the creation of a “Class C” stock that is exactly the same as its other stock classes, except for one crucial difference: the Class C shares would have no voting rights. This move allows Zuckerberg to give away 99 percent of his shares to charity, as he previously pledged to do while retaining control of the company. That is because he would only give away these new, nonvoting shares.

This move enraged most shareholders, who promptly filed a class-action suit to halt the creation of this new stock class. In short, the suit charged that the company’s board of directors breached their duty to shareholders by allowing this change. The move, the suit argues, devalues investor shares and disproportionally benefits Zuckerberg. The case is set to go to trial next week.

Merger Objections Fall

Despite the media attention that high-profile cases typically receive, lawsuits against high-value mergers, for example, have been on the decline over the past few years. Less than two-thirds of mergers worth more than $100 million faced shareholder litigation in the first half of 2016, the lowest rate in more than a decade.

But that does not mean shareholders have been quiet, either. For example:

  • CBS shareholders sued the company’s board of directors last year for signing off on $10 million in bonuses paid to former chairman Sumner Redstone, who left the company in February of 2016, in part because he “suffers from either mild or moderate dementia.”
  • Shareholders of Signet Jewelers, the world’s largest diamond retailer, sued the company for securities fraud, claiming the company made false and misleading statements about the level of sexual harassment claims leveled against the Ohio Company.
  • Another example, shareholders of MaxPoint Interactive, a North Carolina tech firm, sued the company over what it called incomplete and misleading financial statements that were released in advance of a proposed merger.

Colorado Protects Minority Shareholders

Colorado law is meant to protect all shareholders while taking special care to look after the interests of minority shareholders. The law states, in part, that:

  • Shareholders must earn a fair price.
  • The company must be transparent, giving shareholders accurate and complete information.
  • Companies must inform shareholders about any proposed sale of significant company assets.
  • The company must act in the best interest of the company.
  • Companies must tell shareholders about material information (good or bad) when initiating a transaction with the corporation.
  • The company can’t act solely on behalf of a specific set of shareholders in a way that would harm any other group of shareholders.

Without these safeguards, a minority shareholder’s interest would be held hostage by those in control of the company. If you are a minority shareholder who has suffered because of the actions of others within the company, or by the corporation itself, you could be entitled to compensation. The Colorado corporate litigation attorneys at Burg Simpson have decades of experience fighting for shareholder rights. Please contact us at 303-792-5595 if you would like to talk about your situation.