Closely Held Corporations and Shareholder Oppression Claims
The Internal Revenue Service (IRS) defines a closely held corporation as an entity that has more than 50 percent of its outstanding stock owned by five or fewer people. In many cases, a single individual has a majority controlling stake in a closely held corporation. By definition, majority shareholders have significant control over the management of a closely held corporation.
A consequence of this is that minority shareholders are put in a potentially vulnerable position. One of the few tools that minority shareholders have is known as a shareholder oppression claim. Here, our Miami shareholder disputes lawyers highlight the key things that you should know about shareholder oppression claims and closely held corporations in Florida.
What is Minority Shareholder Oppression?
Broadly defined, shareholder oppression happens when majority shareholders act in a manner that unfairly prejudices the firm’s minority shareholders. As minority shareholders are vulnerable, oppression is an issue that must be monitored. In practice, shareholder oppression can come in a wide range of different forms. Some examples include:
- Withholding dividends;
- Forcing sales of stock an unfavorable prices;
- Unfairly increasing compensation to majority shareholders; and
- Withholding material information from minority shareholders.
One of the primary reasons why shareholder oppression most often occurs in closely held corporations is that there is no public market available for shares of the company. As a result, it is very difficult for minority shareholders to sell their stock and exit the corporation. Selling directly to a majority shareholder may be the only realistic option.
Minority Shareholder Oppression Claims in Florida
Although Florida technically lacks a minority shareholder oppression statute, minority shareholders have still legal rights under state law. Most importantly, majority shareholders owe a fiduciary duty to minority shareholders. They cannot use their controlling position to put minority stakeholders at a tangible financial disadvantage. If shareholder oppression persists, minority shareholders generally have two primary legal options available to them:
- Bring a shareholder derivative claim on behalf of the corporation; or
- Petition for the dissolution of the corporation.
With a shareholder derivative claim, legal action is being taken against corporate directors/officers on behalf of the company. With closely held corporations, the directors/officers are often majority shareholders. With a dissolution claim, the minority shareholder seeks to dissolve the company in order to protect themselves against further damage caused by a breach of fiduciary duty. As these are both strong legal steps, majority shareholders will want to avoid facing litigation from a minority shareholder. If you have any questions about shareholder oppression claims in Florida, an experienced attorney can help.
Call Our Florida Shareholder Rights Attorneys for Guidance and Support
At Pike & Lustig, LLP, our Florida shareholder rights lawyers are committed to helping our clients find solutions that best protect their interests. If you have any questions closely held corporations and shareholder oppression claims, we are available to help. Call us today for a confidential review of your case. We represent shareholders in West Palm Beach, Miami, and throughout all of South Florida.
Resource:
irs.gov/faqs/small-business-self-employed-other-business/entities/entities-5#:~:text=Generally%2C%20a%20closely%20held%20corporation,of%20the%20tax%20year%2C%20and
