The wealthy exert tremendous control over others in nearly every role they assume in life, including that of shareholders. That’s why only a few courts have ever held that majority shareholders owe any special duties to others.
However, there are a few exceptions to this unwritten rule in California and elsewhere. In the case of Jones v. A. H. Ahmanson, the court held that majority shareholders must provide non-controlling shareholders with complete disclosure regarding their transactions. In that case, the court held that it was wrong for controlling shareholders to create a separate, publicly-held holding company so that it could greatly diminish the public market interested in buying minority shares.
Given the serious lack of transparent dealings on Wall Street, it’s still difficult to say how often majority shareholders honor such ethical rules. Yet a number of courts are open to arguments of self-dealing when plaintiffs can prove that majority shareholders have purposefully taken advantage of those owning far less stock in a given company.
Examples of Questionable Self-Dealing by Majority Shareholders
Selling the corporate assets of one entity to another in an effort to preclude minority shareholders from taking part in a new transaction or venture;
Selling specific corporate assets for unreasonably low prices, in an effort to prevent minority shareholders from obtaining ownership interests;
Arms-length transactions between a corporation and one of its directors, officers or controlling shareholders. These may be illegal when certain aspects of self-dealing are clearly undermining non-controlling shareholder’s rights;
Requiring all shareholders to vote on a transaction which the majority shareholders already know involves major elements of self-dealing – simply in an effort to cover wrongdoings. Minority shareholders often can’t even try to uphold their rights since they usually have to own fairly sizeable percentages of a company’s stock (often 5% or 10%) in order to file derivative lawsuits;
Failing to disclose conflicts of interests. Many corporate officers and those serving on the board of directors of various companies own stock in various other companies. Each of these individuals must regularly abstain from voting on possible new transactions that are likely to greatly benefit their separate, outside investments;
Hiding the full transactional costs of any business deal from non-controlling shareholders. When you fail to make known all of the costs of each transaction, you deny other parties the opportunity to make informed choices;
Should you be a shareholder and ever question the legality of certain corporate decisions, be sure to meet with your Peachtree City business attorney to discuss your various options, including the possibly of filing a shareholder’s derivative lawsuit.
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.