Understanding Minority Shareholder Rights: Legal Protections and Recourse

There are a variety of risks that can come with being a minority shareholder. Despite not having the same power or control over a corporation as majority shareholders, minority shareholders still have several rights and remedies under Illinois law. If you own a non-controlling interest in a corporation or an LLC, it’s essential to understand your legal protections and opportunities for recourse in the event your minority shareholder rights are violated by the majority shareholders.

What is a Minority Shareholder?

A minority shareholder is one who possesses less than 50% of the shares in the corporation and no majority control over the operations of the business. In contrast, a majority shareholder has more than 50% of the shares in the company and power over the company’s decisions. While the majority shareholders have the most control in the company, minority shareholders still have certain rights and legal protections.

What are Minority Shareholder Rights?

Majority shareholders owe a fiduciary duty to minority shareholders to act in the company’s best interests. Although minority shareholders have less power than the majority shareholders, they still have certain legal rights. These include the right to receive profit distributions and review financial statements and corporate records.

Specifically, minority shareholders are entitled to the following rights:

• The right to notice of a shareholder meeting and voting rights — Minority shareholders who have voting rights must receive advance notice of shareholder meetings. They may also petition the court to require a meeting if the majority shareholders refuse to hold one.
• The right to inspect the corporation’s books and financial records — Minority shareholders may examine corporate records for a “proper purpose.” In other words, a minority shareholder may examine the books for the purpose of protecting the interests of the company. However, they must first make a demand on the company, identifying which records the shareholder wishes to inspect.
• The right to dissent and receive payment for shares — In some cases, a minority shareholder is permitted to dissent from a corporate action and receive the fair market value of their shares. These instances can involve any situations in which the corporate documents allow for shareholder dissent.
• The right to maintain a derivative action — When a company is harmed by a majority shareholder, officer, or director, a minority shareholder may bring a derivative action on behalf of the company. In order to do so, the minority shareholder must be able to show that they made a demand upon the company before filing suit and such demand was denied, or making a demand would have been futile.

A shareholder agreement can help safeguard minority shareholder rights. This document can give minority shareholders contractual rights beyond those provided by Illinois law. Another option companies may consider is weighted voting rights for certain issues — this gives the minority shareholders’ vote more weight than they would otherwise have based on the percentage of their shares.

What Legal Remedies Do Minority Shareholders Have?

While conflicts between majority and minority shareholders are not uncommon, those with a non-controlling interest may take legal action when their minority shareholder rights have been violated. Critically, shareholder oppression takes place when the majority shareholders of a corporation act in a manner that is fraudulent, illegal, or oppressive toward the minority shareholders. For instance, the majority shareholders might attempt to freeze out a shareholder and force them to sell their shares in the company at an unfair price. The majority shareholders might also deny the minority shareholders the chance to inspect the corporate records, fail to notify them about meetings, or misuse corporate funds.

Minority shareholders have legal recourse in cases involving wrongful behavior by the majority shareholders. A minority shareholder may be entitled to a statutory remedy if they can establish any of the following: (1) the controlling shareholders have acted illegally; (2) corporate assets have been misused; (3) shareholders are deadlocked when it comes to determining corporate affair management; or (4) shareholders are deadlocked regarding filling a board vacancy.

If you are a minority shareholder, it’s important to know your rights in the company. An experienced business law attorney at Litico Law Group can advise you of your rights and help ensure your interests are protected. Schedule a consultation and learn how we can help.

Depending on the facts and circumstances, relief under the Illinois Business Corporation Act can include:

• An accounting with respect to any matter in dispute
• The performance, alteration, prohibition, or setting aside of any action of the corporation or its shareholders
• Cancellation or alteration of any provision in the Articles of Incorporation
• Removal of any director or officer
• Appointment of any individual as a director or officer
• Appointment of a provisional director
• Appointment of a custodian to manage the business
• Payment of dividends
• Submission of the dispute to mediation or another form of alternative dispute resolution
• An award of monetary damages
• The purchase by the corporation of all the petitioning shareholder’s shares
• Dissolution of the company if no other sufficient remedy exists

Minority shareholders should take measures to protect their interests in advance. When negotiating the company’s shareholder agreement, minority shareholders should seek the right to appoint a board member, as well as veto rights for certain decisions. They should also consider the negotiation power afforded by the agreement. Importantly, minority shareholders should only enter into an agreement that clearly outlines their expectations.

Contact an Experienced Illinois Shareholder Dispute Attorney

If you are a minority shareholder, it’s important to know your rights in the company. An experienced business law attorney can best advise you of your rights and help ensure your interests are protected. Located in Rolling Meadows, Litico Law Group provides knowledgeable representation to shareholders, business owners, and entrepreneurs throughout Illinois for a wide array of business matters, including those involving minority shareholder rights. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.