What are Minority Shareholder Rights in a Private Company?

Minority shareholders rights

If you have been offered to become a minority owner, do not agree before getting clear on your rights. Minority shareholder rights in a private company are often more limited than people assume so you could be in for an unpleasant surprise.

Here are critical aspects of minority shareholders rights you need to know:

What Is a Minority Shareholder?

A minority shareholder is a shareholder who holds 49% of a company’s voting shares or less. As a result, a minority owner does not have control over the company. In contrast, majority shareholders control 51% of the vote or more, giving them decision-making power over how the business is run.

What Issues Do Shareholders in Private Company Ventures Face?

This power imbalance can make life difficult for minority shareholders when they disagree with certain business decisions, but there is little they can do about it. In some cases, majority owners looking to impose their will can go so far as to:

  • Lock minority owners out of bank or other accounts
  • Fire minority owners if they are also employees of the company
  • Reinvest profits back into the business instead of distributing them among minority shareholders
  • Increase majority owner pay and benefits so that there is no profit left to distribute

It is not unheard of for majority owners to take all these steps to force minority shareholders to cash out and leave the company for good.

You should be especially careful if the company is an S corporation. In that case, you may receive an IRS 1099 form reflecting your share of the profits, even though you have not received anything because distributions were stopped and the money was reinvested. This is known as phantom income, and you typically owe taxes on your share of the reinvested profits. So, be sure to read up on S Corp minority shareholder rights before agreeing to become a minority owner.

Minority Shareholder Rights in a Private Company

Most private companies have governing documents that lay out the rights and responsibilities of the owners. 

If the company is a corporation, minor shareholder rights will be spelled out in the Articles of Incorporation and the Shareholder Agreement. In the case of a Limited Liability Company (LLC), the relevant documents are the Articles of Organization and the Operating Agreement. There may be additional agreements that govern shareholder rights as well.

If the company does not have a written agreement, you are left with the default shareholder rights defined in the Florida Statutes. These are also known as statutory shareholder rights and can be found in:

Unless the governing documents state otherwise, minority shareholders generally have the following rights:

Right to Vote 

As a minority shareholder, you are entitled to vote for the board of directors (if the company is a corporation) or the manager (if the company is an LLC).

Right to Review Books and Records

You have a right to inspect the company books and records upon request. If the majority shareholders withhold documents, you can demand an inspection in writing per the Florida Statutes.

Right to Dividends or Profit Distributions

Finally, you are entitled to receive dividends or profit distributions from the company. However, you can only receive these if they are declared.

Minority Shareholder Protection

Minority owners are often unpleasantly surprised to learn that the rights of a 49% shareholder are so limited. 

Contrary to popular belief, there is no right to continued employment – even if a minority shareholder served as a valuable employee for many years. You also do not get a say in business strategy or the day-to-day running of the company. As if that were not enough, you could get stripped of all financial benefits stemming from ownership if the majority shareholders stop profit distributions.

The good news is that there are certain legal instruments for the protection of minority shareholders. We discuss some of these below. 

However, keep in mind that minority shareholder law is complicated, and a lot more goes into it. If you find yourself in a business dispute with a majority owner, it is important to speak with our shareholder dispute attorneys as soon as possible. We specialize in minority shareholder protection and will do everything we can to protect your interests.

Contact the Cueto Law Group today if your minority shareholder rights are being threatened.

Minority Oppression Lawsuit

Majority shareholders owe a fiduciary duty to run the business in the best interests of the company. 

Among other things, this means they cannot deny minority shareholders the right to participate in the business or enjoy financial benefits from their ownership. This conduct is known as minority oppression, common examples of which include:

  • Removing minority owners from the board of directors or other management positions
  • Diverting earnings through excessive compensation of majority owners
  • Failing to declare dividends or profit distributions even though the company is profitable
  • Signing favorable contracts with individuals or entities affiliated with majority owners

If a majority owner engages in oppressive conduct, you can bring a lawsuit for minority oppression and seek damages or a court-mandated buyout of your shares at a fair market price.

Well-Drafted Agreements

The best defense against minority shareholder oppression is well-drafted agreements that protect your interests from the start. 

For instance, if you are an employee of the company, a written employment agreement can be a highly effective tool to protect your rights. You could also negotiate an addendum to the Shareholder or Operating Agreement to prevent common minority oppression tactics.

Are the Rights of Minority Shareholders in Closely Held Corporations Different?

A closely held corporation is the same as a private company. It is private in the sense that its stock is not publicly traded but is owned by a small group of private shareholders. Most businesses in the U.S. are closely held. They range in size and include corporations, LLCs, and other types of legal entities. The rights of minority shareholders in closely held corporations and private companies are generally the same.

Need Help with Minority Shareholders Rights?

Our team can help you whether you are thinking of becoming a minority shareholder or have a running dispute with majority owners.

Contact the Cueto Law Group to protect your interests today. 

Final Thoughts on Minor Shareholder Rights 

For all its pitfalls, minority ownership in a business has many benefits. To make the most of your minority shareholder status, you need to know your rights and responsibilities, the rights of majority shareholders, and what legal tools can help protect your interests.

Minor Shareholder Rights FAQs

Here are the answers to some common questions we get in our practice:

Can a Majority Owner Fire a Minority Owner?

Yes, a majority owner can terminate a minority owner if they are employed by the company. Minority ownership does not generally entail a right to continued employment in Florida. However, the termination will be subject to the company’s governing documents and the employment agreement, if any.

What Are the Benefits of Being a Minority Shareholder?

Minority shareholders can vote for the board of directors or managers, inspect company books and records, and receive dividends or profit distributions. Like any shareholder, they can attend the annual shareholder meeting. They also have the right to cash out in the event of a merger or an acquisition.

Can a Minority Shareholder Sell Their Shares?

Yes, a minority shareholder can sell their shares when and as they see fit in order to make a return on their investment. You are free to do so while the company is privately held or wait until it makes its public offering at a future date.

Cueto Law Group P.L.