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Minority shareholder oppression scenarios are typical. An individual joins a closely-held business as a minority owner and employee, with the understanding the benefits of ownership will compensate for the below-market salary. The individual is terminated and, either during or after employment, the majority shareholders take actions to deprive the minority shareholder of the reasonably expected benefits of ownership, which often includes lining their pockets.
Minority shareholder oppression case litigation often requires analyzing the salary, dividends and bonuses paid—or not paid—to the employees and shareholders. The terminated minority shareholder/employee will no longer receive salary or bonuses, while the majority shareholders continue to pay themselves substantial salaries, loan themselves money at below-market rates, and pay themselves substantial bonuses.
In White, an individual joined a start-up business as an 8% shareholder and employee. Several years later he was terminated. Prior to his termination the company never paid significant bonuses. After his termination he sued for oppression claiming the majority shareholder was taking interest-free loans, paying substantial bonuses (while not declaring dividends) and, after paying substantial bonuses, forcing a capital call to dilute his interests.
Among other holdings, the bankruptcy court found the bonuses were disguised dividends. Factors considered included the bonuses were declared at year-end, when the company’s earnings were known, and the corporate tax benefit of declaring bonuses instead of dividends.
The disguised dividends, personal loans, and imposition of a post-bonus-payment capital call, led the court to find shareholder oppression and award damages. It also ordered the company, at the election of the minority shareholder, to either buy the minority shareholder out or be subjected to an injunction dictating how compensation of any kind may be paid.
For more information regarding shareholder oppression actions and protecting your business interests, contact Gregory M. Clift at 214.239.2777 or gclift@cdklawyers.com.
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