Minority Shareholder Rights in Chicago

Minority shareholders have far less power than the shareholders who own a majority stake in the company. Over time, the majority shareholders and minority shareholders may develop fundamental disagreements over the best course of action for the corporation. The best defense is a strong shareholder agreement that anticipates situations that may occur and outlines the parties’ rights at a time when there is no conflict. The Chicago business transactions attorneys at MacDonald, Lee & Senechalle can help you plan your shareholder agreement to avoid potential conflicts and create agreed methods of dealing with conflicts.

However, business partners often fail to plan ahead, and we can help to resolve conflicts that arise. In some cases, the only remedy minority shareholders have for a wrongful action of the majority is to take legal action. The Chicago business attorneys and litigators at MacDonald, Lee & Senechalle can help you protect your rights and your investment as a minority shareholder or to deal with minority shareholders who have unreasonable expectations. Contact our offices today for a consultation on your case.

Shareholder relationships.

Majority shareholders in a corporation owe a fiduciary duty to their fellow shareholders. Majority shareholders are required to treat minority shareholders in the same manner they wish to be treated. Minority shareholders are entitled to proportional distributions of profit, and they are entitled to receive financial statements and to review corporate financial records, and they are entitled to attend shareholder meetings and to voice their opinions. Unless the articles of incorporation provide otherwise, minority shareholders are entitled to vote for the board of directors.

Obviously, minority shareholders will not be able to control the actions of the corporation, and they are not entitled to have their opinion prevail.  This can be very frustrating and may lead to conflicts. Over time, business partners may find their opinions diverge about how to handle the business and what direction to take. Partners may become disillusioned with their partner’s work ethic or competence. Minority shareholders may feel they are not receiving adequate dividends, and majority shareholders may feel a minority shareholder doesn’t understand the needs of the business and has unreasonable expectations of the compensation they are entitled to. These are frequent sources of conflict, and the business attorneys at MacDonald, Lee & Senechalle can represent the corporation or the minority shareholders to seek to resolve the conflicts.

But, when majority owners in a corporation use their power to deny the legal rights of a minority shareholder, attempt to force them to sell their shares, or unfairly enrich themselves when the enrichment comes at the detriment of minority shareholders’ interests, this goes beyond frustration and can be considered a violation of minority shareholder rights. When such violations occur, minority owners may have a right to take legal action. At times, the conflicts may become so entrenched that the shareholders are deadlocked, and management of the company is unable to make necessary decisions to run the company.

Without a shareholder agreement providing for re-purchase rights, minority shareholders can’t be forced to sell their shares, but in some cases, majority shareholders may take unfair advantage of minority shareholders in one of the following ways:

• Majority shareholders refuse to declare a dividend and instead defer that income into corporate salaries or other benefits. Majority shareholders who work for the corporation are entitled to reasonable, market-based compensation, and it is prudent to retain funds in the corporation for foreseeable risks. But sometimes majority shareholders go too far and deliberately divert profit into excessive salaries or benefits to avoid distributing dividends to minority shareholders. Minority shareholders have the right to challenge such diversions.
• Minority shareholders have their share of ownership reduced through dilutive financing without adequate disclosures or opportunity to vote, or for reasons that are fundamentally different than the corporate purpose contemplated by the parties. A shareholder agreement can help to clarify a shareholders’ right to approve additional dilutive funding and their right to participate in such funding.
• Majority owners refuse to allow minority shareholders to inspect the corporation’s books or records of account, or refuse to give them notice of meetings.
• Majority owners spend down profits in an irresponsible manner to avoid paying dividends.
• Ending the employment of a minority shareholder without cause.

Illinois law provides remedies for minority shareholders and resolution of corporate deadlock when partners have grown apart and are no longer able to reach a compromise solution.

Illinois law offers several potential remedies when shareholders become deadlocked or for controlling shareholders’ fraudulent behavior. The Illinois Business Corporation Act states that, if a shareholder can prove one of the following four events, they may have a right to one of the remedies provided under the statute:

• Shareholders are deadlocked in determining the “management of corporate affairs”;
• Shareholders are deadlocked in electing directors to fill vacancies on the board, and have been for at least two consecutive annual meetings;
• Controlling shareholders or directors have acted illegally, fraudulently, or oppressively; or
• Assets of the corporation are being wasted or misapplied.

Shareholders who can prove one of these conditions in a shareholder suit will be entitled to one or more of the twelve remedies offered under Section 12.56(b) of the Business Corporation Act. These remedies are broad and include:

• Provision of an accounting
• Appointment or removal of a director or officer
• An award of money damages to a shareholder
• Revision or termination of the governing documents of the corporation
• In extreme cases, the dissolution of the corporation

Defining the rights of shareholders in a shareholder agreement or working through shareholder disputes or getting the remedy you deserve when you’ve been the victim of fraudulent actions requires the help of experienced and professional corporate attorneys. The Hoffman Estates business transaction lawyers and litigators at MacDonald, Lee & Senechalle are seasoned practitioners of Illinois corporation law. Our Chicago business attorneys can help you define the rights of the parties to avoid future problems or intervene when your rights and fiduciary interests as a shareholder have been infringed or ignored. Contact our offices for a no-cost consultation on your shareholder agreement or dispute.

Chicago Attorneys at MacDonald, Lee & Senechalle

For seasoned and effective legal advice on an Illinois corporate shareholder issue, speak to the Chicagoland business law attorneys at MacDonald, Lee & Senechalle in Des Plaines at 847-298-5030, or in Hoffman Estates at 847-310-0025.