How Majority Shareholders Can Remove Minority Shareholders or Reduce Their Value
Shareholder disputes between majority and minority stockholders are not uncommon in business litigation.
There are ways shareholders who own the majority of the company’s stock shares can remove minority holders or reduce their value in the business. The motivation to reduce minority shareholders’ ownership percentage is usually rooted in the majority stockholders’ desire to increase their influence in the company and maximize their own profits.
How Can Majority Remove Minority Shareholders?
There are several methods for reducing a minority shareholder’s value in the company, including:
- Encouraging or forcing a share buyout at a discount price;
- Diluting the holder’s stock shares;
- Restricting the shareholder’s access to corporate records, financial information, or key business records;
- Discontinuing distributions to minority holders; and
- Voting to terminate the shareholder.
Often, majority holders use multiple methods to remove a minority shareholder or reduce their influence in the company. In business litigation, the practice is known as squeeze-out or freeze-out.
Squeeze-Out as a Breach of Duty of Good Faith
When majority shareholders pressure minority stockholders into selling their shares, it is vital to seek help from a business litigation attorney. In every state, majority owners of a corporation or limited liability company (LLC) generally owe a duty of good faith to minority owners. The duty of good faith requires members of corporations or LLCs to act with conscious regard for their responsibilities as fiduciaries.
In other words, if majority shareholders choose to remove a minority holder or reduce their ownership percentage while breaching the duty of good faith, the minority shareholder can pursue a lawsuit against the fellow stockholders.
Majority vs. Minority Shareholder Disputes in Closely-Held Businesses
The risk of majority shareholders “squeezing out” minority holders is much greater in closely-held businesses with a lower number of shareholders. A large percentage of small businesses are categorized as such.
Meanwhile, the risk of majority shareholders removing minority holders is not as significant in widely held businesses on a stock exchange due to the larger number of stockholders. Typically, the board of directors in closely-held companies is comprised of the majority shareholders. As a result, majority holders – who are also the board of directors – can create a power imbalance in the company in order to eventually squeeze out the minority shareholder.
When shareholders who own the majority of the company’s shares control the board of directors, they can influence any decisions made by the board. In this situation, minority shareholders are at a disadvantage due to the lack of power.
A squeeze-out is more likely to occur when there is an imbalance in power among shareholders, especially when the shares of the minority holders are less valuable than those of the majority stockholders.
If you are a minority shareholder and are worried about the risk of a squeeze-out, contact an experienced Atlanta partner/shareholder disputes attorney for a consultation. Speak with our lawyers at Carroll Law Firm to protect your rights as a minority shareholder in Georgia.