What you need to know to protect your Minority Shareholders rights.
By H. Joel Newman
Now more than ever, small businesses can turn suddenly and sharply for better or worse. And, if you’re in a position of little or no control, it’s imperative that you protect yourself and your interests. These proactive measures can help you along the way.
The Michigan Business Corporation Act permits a shareholder to sue if the acts of directors or others exercising control are “illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder."
Know those in control.
If financial control changes, it’s important to do your homework about those with controlling interest in the company. Read their professional biographies, look into their past business practices and understand their philosophies. Check their litigation history. While history doesn’t always repeat itself, sometimes it can be a clear window into the future.
Attend Shareholder Meetings.
And ask questions. While you’re there, remember your statutory shareholders right of inspection to review and copy company balance sheets, income statements, and sources and application of funds. These documents, as well as articles of incorporation, bylaws, and operating agreements are minority owners’ first line of defense in the event of a law suite.
Know the Law - and When it’s Been Broken.
- • Interfere with voting rights
- • Withhold material information
- • Withhold dividends
- • Eliminate employment or benefits
- • Conduct unfair business transactions with other companies that are self-owned
- • Make loans with high interest rates to the company
- • Obtain business opportunities in the company’s line of business for self gain
- • Unreasonably compensate one’s self
- • Make improper capital calls, such as requesting funds from investors
- • Execute bad-faith maneuvers that dilute or “freeze out” minority ownership shares
Know Your Rights.
Shareholders have a statutory right to inspect the company’s list of stockholders, stock ledger and other records related to their interests. Likewise, directors have the right to inspect any documents relevant to their position. If the company fails to provide such requested documents, the shareholder or director can bring a court action. The court will require the company to cover attorney’s fees if the shareholder or director prevails, unless the company shows it acted on a good-faith belief that the demand was improper.
Take Immediate Action.
There is some split of authority among the courts regarding the applicable statutes of limitation. Although some courts have ruled that some lawsuits under the Michigan Shareholder Oppression Corporation Act extend for 6 years, The Michigan Supreme Court ruled that there is a 2-year statute of limitation for minority owner oppression claims for filing a suit when actionable wrongdoing is discovered or reasonably should have been discovered, or within three years of the occurrence of any wrongdoing, regardless of when or if it is discovered. If you’re rights have been affected, take action immediately.
H. Joel Newman is an attorney specializing in business litigation, commercial litigation and shareholder disputes. Practicing in Oakland County Michigan, Wayne County Michigan and Macomb County Michigan.