One way that some small companies get the money they need to start or grow the company is by selling shares of the business. These shares give the person or company who buys them partial ownership of the company, and gives them the title of shareholder. This partial ownership grants the shareholder certain rights. However, which rights they are given depend on whether they are a major or minority shareholder, and whether rights are granted by a shareholder agreement. Minority shareholders typically have far fewer rights than majority shareholders, which can allow the majority shareholders to try to oppress them during shareholder disputes. To learn more about your rights as a minority shareholder in a Pinellas County business, call Clearwater Business Law at (727) 502-6874 to schedule a consultation.

What Is a Minority Shareholder?

There are many ways to define shareholders: record, beneficial, unrestricted voting trust beneficial, majority, minority, and others. For the purposes of understanding a shareholder’s rights, the two main types of shareholders are majority and minority. Majority shareholders own and control more than 50% of a company’s shares. Minority shareholders own and control less than 50% of a company’s shares.

By these definitions, a company can only have one majority shareholder at a time. However, the same company can have multiple minority shareholders, or be made up entirely of minority holders if no one owns and controls more than 50% of the business.

The Three Rights Granted to Minority Shareholders By Florida Law

While majority shareholders can do almost anything they want to run their companies, Florida does not give a minority shareholder nearly as much freedom. In fact, there are only three privileges that Florida gives to shareholders who own only a fraction of the company. Shareholder rights are provided by the Florida Business Corporation Act. The first of those rights is the right to vote in board of directors elections. The second is the right to receive profit distributions if the company declares them. Under FL Stat. § 607.0604, the right to vote and the right to receive profit distributions are also granted to fractional shareholders. This means that even shareholders who do not own a full share have these rights.

The third right is the right to request and review the company’s legal and financial records. Under FL. Stat. § 607.1602, the shareholder must give the company at least five days’ written notice before the date they want to inspect and copy these records. These records include financial statements, officer and director payments, vendor payments, employment payroll, and meeting minutes for shareholders and board meetings. However, even though these may be the only rights explicitly laid out, there are other rights generally assumed, such as the right to fair treatment, the right to fair payment during a buyout, and the right to expect majority shareholders to uphold their fiduciary duties and act in the best interests of all shareholders. Additionally, the rights of minority shareholders may still be violated by majority shareholders through insider trading, dividend discrimination, share dilution, or oppressive conduct.

Can a Minority Shareholder Have More Rights?

Though minority shareholders have limited rights under Florida law, this does not mean those are the only rights they can have. A written agreement between the shareholders can expand these rights. Such an agreement must be signed by all shareholders. This is the most effective tool to provide more rights for minority shareholders. Examples of the expanded rights that may be granted in shareholder agreements include:

Veto Rights: Provides minority shareholders the ability to block transactions they find unfavorable by requiring unanimous or supermajority approval of major corporate decisions, such as mergers, asset sales, or acquiring significant debt.
Guaranteed Board Seats: Ensures the minority perspective is heard and considered by securing representation on the company’s board of directors.
Dividend Policies: Prevents the majority shareholder from arbitrarily withholding dividends to put pressure on the minority by stipulating rules regarding the distribution of corporate profits.
Enhanced Information Rights: Expands the right to inspect and copy financial and legal records by requiring regular, detailed financial reports and operational updates.
Buy-Sell Provisions: Protects minority owners if they wish to exit the company or the majority shareholder tries to force a buyout by establishing clear rules and a fair valuation method for triggering the purchase and sale of shares.
Dilution Protection: Prevents the majority from diluting the minority owners’ equity stakes by including pre-emptive rights that give existing shareholders the option to purchase a proportional number of any newly issued shares.

Minority Shareholder Rights During Business Disputes

Whether a large corporation or a small company, it is quite common for shareholders to disagree on matters. When this happens, it is also quite common for the majority shareholder to use their power as majority owner to “punish” or oppress the minority shareholders. Shareholder oppression may take the following forms:

Removal of a minority shareholder from their position on the board of directors
Refusal to issue dividends, despite the company being profitable
Cancellation of contracts with the minority shareholder’s affiliate company
Increase in the majority shareholder’s salary to reduce company profits

There is not much a minority shareholder can do at the moment when a majority shareholder chooses to engage in these oppressive behaviors. However, there is a remedy after the fact that they can pursue. To pursue this remedy, they can file a lawsuit claiming oppression of minority rights. Through this lawsuit, they can request that the court grant them monetary damages or a court-ordered buyout of minority shares. If the court grants a buyout, either the court or a neutral third party will assess the fair market value of the shares to determine how much the shareholders should be paid.

Evidence Required to File Lawsuit

Like any other lawsuit, a minority shareholder or group of shareholders will need evidence to prove their claim. This evidence will include documentation, such as financial statements, meeting records, and other company records that demonstrate their rights have been violated. If there are witnesses with direct knowledge of the violations being alleged, they may be called to testify.

Expert testimony from witnesses such as accountants or financial analysts may be required for opinions regarding valuations or damages stemming from the violations. Circumstantial evidence, such as inconsistencies in company records or behavior patterns, may also help support the claim. An experienced Florida business litigation attorney with Clearwater Business Law may be able to assist with identifying and collecting evidence to support a shareholders’ rights violation lawsuit.

Common Legal Defenses the Majority Shareholder May Claim

Majority shareholders may use a variety of legal defenses to get a lawsuit dismissed or to win. However, there are a handful of defenses that are more commonly used, including:

Insufficient Evidence: This argument claims that the minority shareholder’s case does not have sufficient evidence to back up the claims being made.
Statute of Limitations: Every state has a statute of limitations on almost every type of lawsuit, or a period of time during which the lawsuit can be filed. After the statute of limitations has expired, the case is invalid and unlikely to be heard by the court. The company may argue that the statute of limitations has expired to get the case dismissed.
Lack of Standing: Standing is the legal right to bring a case to court and requires the individual to prove they have suffered or will suffer an “injury in fact,” that the defendant’s actions caused the injury, and that the court can correct this injury with a favorable decision. The company may try to argue that the shareholder does not have standing. For example, they may claim the shareholder does not own a sufficient number of shares in the company.
Business Judgment Rule: This is a legal doctrine that presumes directors and officers are acting in good faith and keeping the company’s best interests in mind when making decisions. Cornell Law School’s Legal Information Institute explains that if the shareholders filing the lawsuit can show the directors and officers acted in bad faith or gross negligence, or had a conflict of interest, the court may not uphold the business judgment rule.
Waiver or Estoppel: With this argument, the company claims that the shareholders have waived their right to the lawsuit, or are estopped from bringing it. This may be used in situations such as if the shareholders consented in the past to the action being challenged in the lawsuit.

How to Enhance Shareholder Protections

Whether it is adding additional rights or wanting to ensure the clarity and certainty of those already granted by state law, shareholders can enhance their protections in different ways. However, it is worth noting that most options require all shareholders to agree, which means if only one minority shareholder or a small group is asking for enhanced protections, they may not be successful.

Draft a Shareholder Agreement

The most effective tool for protecting minority interests beyond Florida’s statutory minimums is to draft a customized shareholder agreement. This can include a variety of provisions, including ones that are not typically granted. However, all shareholders must sign the agreement. No shareholder, including the majority shareholder, can be forced to sign. Everything continues as is if even one shareholder refuses to sign, which may make this a difficult option if a dispute is already happening.

Amend Corporate Bylaws and Articles of Incorporation

The company’s bylaws and articles can be amended to formalize additional protections for shareholders. Measures such as cumulative voting or supermajority requirements can be written into these organizing documents. This option also requires all shareholders to be in agreement to proceed.

Seek Legal Counsel

Specific rights and safeguards, such as appraisal rights or being able to petition for dissolution of the company, can vary. Therefore, shareholders may wish to consult with legal counsel to learn more about the specific options available to them based on the company itself, the rights in question, and any existing or previous disputes. An attorney may be able to provide more detailed options based on the information provided by the shareholder.

How a Business Law Attorney May Benefit You

Owning even fractional shares of a small company makes you an owner of the company. However, the rights associated with that ownership are often limited when you own only a small share. Even so, those rights are important. If they are violated, minority shareholders have the right to seek a remedy for that violation. A business litigation attorney with Clearwater Business Law may be able to assist you with avoiding such violations from happening by drafting shareholder agreements or amending company documents, assessing your options when violations occur, and determining the most appropriate way to pursue a remedy. When a lawsuit is the right option, they can also assist with gathering evidence, finding expert witnesses, and filing the appropriate paperwork. Call (727) 502-6874 to book a consultation in our Pinellas County office and learn more about your shareholder rights.

Right Of Minority Shareholders In Small Companies