What is Shareholder Oppression and What Can Be Done About It?

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What is Shareholder Oppression and What Can Be Done About It?

Shareholder oppression occurs when the majority shareholders or directors of a corporation control and operate the business in a way that harms and unfairly prejudices the minority shareholders. The minority shareholders often have no decision-making power or ability to question suspect business practices or other improprieties by directors, managers, or other employees. Meanwhile, as shareholders of a closely held corporation, the minority shareholder cannot simply escape the oppression by selling their shares.

Shareholder oppression can arise in a variety of circumstances. A majority shareholder in control of the company may refuse to declare dividends despite the ability to do so, while lining his or her own pockets with an exorbitant salary or getting reimbursed for business expenses that are really personal expenses. Or the majority shareholders may exclude the minority shareholder from the decision-making process, while making unilateral decisions that solely benefit themselves, such as sweetheart transactions with their other businesses.

Although Arizona law does not directly address shareholder oppression as a distinct cause of action, an oppressed minority shareholder has some options. First, a minority shareholder has the court-enforceable right to reasonable notice and participation in shareholder meetings and the right to inspect corporate records and financial data.  Second, an oppressed shareholder can bring an action for breach of fiduciary duty against the majority shareholder (though an LLC member’s ability to file such an action depends wholly on the terms of the operating agreement). Third, A.R.S. § 10-1430 provides for court-ordered dissolution of a corporation in a legal proceeding brought by a shareholder if the directors or those in control of the corporation are acting in a manner that is illegal, oppressive, or fraudulent. Court-ordered dissolution also can occur if the court finds that corporate assets are being wasted, misapplied, or diverted for noncorporate purposes. Thus, minority shareholders can bring legal proceedings to challenge corporate actions that are very similar to causes of action for shareholder oppression.

Whether you are involved in a shareholder dispute or another type of business-related conflict, we are here to help. We will determine the facts and circumstances surrounding your situation, evaluate your case, and determine the best strategy for resolution. At Williams Mestaz, L.L.P., we have the experience and knowledge that you need for your business litigation matter. Contact Williams Mestaz, L.L.P., at (602) 256-9400 for help.

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