Minority Shareholders: Their Rights and the Problems They Face

INTRODUCTION TO THE "SQUEEZE-OUT"

In many small companies the individual or group who own the majority of stock shares may try to remove the minority shareholder from the company or reduce their ownership percentage. This desire to reduce the influence of the minority shareholder can occur for a variety of reasons. The majority shareholders may have differing ideas about the direction of the company; personality issues may have appeared, or the majority shareholders may just wish to retain more control of the company and its profits.

Throughout this series we will detail some of the common methods that majority shareholders use to destroy a minority shareholder's value in the company and what rights a minority shareholder has when this happens.

Methods for Removing Minority Shareholders 

There are several ways of removing a minority shareholder from the company against their will, including:

• Wrongfully terminating the employment of the minority shareholder
• Withholding distributions from the minority shareholder
• Withholding corporate records and access to information from the minority shareholder
• Diluting the minority shareholders' shares
• Forcing a share buyout at a low price fixed by the majority shareholders

Majority shareholders can use a combination of these methods to make the minority shareholder's value in the company worthless.[1] This is known as a majority "squeeze-out" of a minority shareholder.

Georgia Law and Fiduciary Duty

In all of these situations, however, it is important to note that under Georgia law, in any corporation or limited liability company[2] each member owes a fiduciary duty to the other members. A fiduciary duty is the requirement to deal in good faith with the other shareholders and to protect their interests.

Thus, should the majority shareholders take one of these actions without a valid business purpose, the majority shareholders may have breached their fiduciary duties to the minority shareholder, giving rise to a variety of claims under Georgia law for the value of their shares.

Risk of Squeeze-Out in Closely Held Companies

The risk of a squeeze-out appears most often occurs in a closely held company that only has a few shareholders. Many small businesses fall into this category. This is contrasted with large widely held companies on a stock exchange like Microsoft, Apple, etc. These larger companies have the benefit of having a sizeable number of shareholders and oversight from a board of directors.

A closely held company is unlikely to have these advantages for a minority shareholder, as the board of directors will likely be made up of the majority shareholder and the people they select as officers. This kind of board of directors can create a situation where there is an imbalance of power among the shareholders concerning the direction and management of the company.

If the majority shareholders control the board and, with it, the decision making of the company, minority shares are less marketable, because any prospective buyer will be entering a situation where they have no control in the running of the company- not something that many people are willing to do.

As stated above, this imbalance in power and lack of marketability can create a situation where the shares of the minority shareholder are worthless, and a squeeze-out can begin. Throughout this series we will detail some of the common methods that majority shareholders use to destroy a minority shareholder's value in the company and what rights a minority shareholder has when this happens.