All shareholders have fiduciary duties to act in the best interests of their companies and their fellow shareholders. These statues and common law duties, generally applicable to small business, require officers, directors, and controlling shareholders to act honestly, in good faith, and with loyalty to the company and their fellow shareholders. However, shareholders also often have specific rights to participate in the decision-making process for business venture and to allow them to review the business’ financial matters.
It is critical to define and protect these rights in a carefully drafted shareholder agreement and carefully drafted corporate agreements reflecting the expectations of the shareholders, serving as a check on the power of the controlling majority shareholders and helping to avoid the effects of shareholder oppression.
Majority shareholders have the most power in shareholder oppression
It is common for shareholder disputes to erupt when shareholders do not feel heard. After all, they hold stock in the business and typically wish to be involved in the decisions that will impact their investment. One of the most common reasons shareholders do not feel heard is due to the oppression by other shareholders.
Shareholder oppression occurs when majority shareholders exert an unfair influence or display undue prejudice toward minority shareholders. This oppression can manifest in several different ways, including, but not limited to:
- Majority shareholders diminishing minority voting power;
- Freezing out minority shareholders from financial benefits; or
- Denying minority shareholders access to certain financial records.
All of these actions may constitute a breach of a shareholder’s fiduciary duty, of loyalty and due care. . And if majority shareholders usurp too much control over financial and business decisions, it could also create an impermissible conflict of interest which is not in the best interests of your business.
What does this mean for your business?
Situations like these can have serious impacts on your business and personal investment. Aside from legal disputes, your business could also face risks from:
- Imbalanced decisions impacting the future of your business
- Losing minority shareholders
Left unchecked, a shareholder’s unlawful self-interested actions can directly impact your business. Therefore, Minnesota business owners may consider taking action to prevent shareholder oppression.
An effective shareholder agreement is essential
As a business owner, you understand the importance of being proactive. That is critical to reduce the risks that a shareholder dispute could pose to your business. The best way to prevent complex shareholder disputes is to establish a shareholder agreement that clearly outlines:
- What the shareholder’s specific fiduciary duties are
- What strategies to use for conflict resolution
- How shareholders may vote on business issues
Creating a detailed—yet flexible—shareholder agreement which fully reflects and balances the competing interests of the various shareholders is essential to protect the best interests of your company. This can help you avoid shareholder disputes before they happen and manage disagreements efficiently.