Shareholder oppression occurs when the majority
shareholders in a
corporation take action that unfairly
prejudices the minority. It most commonly occurs in non-publicly traded companies, because the lack of a public market for shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. The majority shareholders may harm the economic interests of the minority by refusing to declare
dividends or attempting a
squeezeout
A squeeze-out or squeezeout, sometimes synonymous with '' freeze-out'', is the compulsory sale of the shares of minority shareholders of a joint-stock company for which they receive a fair cash compensation.
This technique allows one or more share ...
. The majority may physically lock the minority out of the corporate premises and even deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them. An important concept in law pertaining to shareholder oppression is the "
reasonable expectations __NOTOC__
Reasonable may refer to:
* Reason, the capacity for rational thinking
* Reasonable accommodation, an adjustment made in a system to accommodate an individual's need
* Reasonable and non-discriminatory licensing, a licensing requirement ...
" of the minority shareholder. The "
fair dealing" standard is also sometimes used by courts.
The potential for shareholder oppression arguably increased when
corporate law was changed to eliminate the
common law right of minority shareholders to veto fundamental corporate changes such as
merger
Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...
s. It has been said that the
business judgment rule and notions of
majority rule have allowed shareholder majorities to use the minority's investment without paying for it. It has also been said, however, that it is difficult to determine how to deal with the rights of the minority shareholder without destroying the corporation, while still respecting the rights of the majority shareholder.
The courts sometimes make
oppression remedies
In corporate law in Commonwealth countries, an oppression remedy is a statutory right available to oppressed shareholders. It empowers the shareholders to bring an action against the corporation in which they own shares when the conduct of the c ...
available. An oppressed minority shareholder can ask the court to dissolve the corporation or to hold the corporation's leaders accountable for their
fiduciary responsibilities. Another remedy sometimes used is court-ordered purchase of shares. As of 1997, the
European Union still had not harmonized laws for dealing with shareholder oppression. In the
United Kingdom, the
Companies Act 2006 governs remedies for minority shareholder oppression. In Australia, section 232 of the Corporations Act sets out the grounds for the making of an order. Contractual protections, such as buyout provisions in a shareholder agreement, have been cited as a potential alternative to statutory protections of minority shareholders. Occasionally, the oppressive conduct may even justify involuntary dissolution of the corporation in order to protect the minority shareholders.
References
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Corporate governance
Oppression