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Employee termination may constitute shareholder oppression

The courts see shareholder oppression as a term that covers many situations involving improper conduct toward minority shareholders. The majority shareholders may be able to exert unfair actions toward them.

Different courts have different definitions of shareholder oppression. Some note “burdensome, harsh and wrongful conduct,” and some define oppression as the “frustration of the reasonable expectations of the corporation’s shareholders.” Termination of an employee who is also a minority shareholder often falls into the latter category.

Oppressive behavior

Regardless of the definition they happen to favor, there are certain types of conduct that the courts generally find to be oppressive toward minority shareholders:

  •           Denying minority shareholders participation in corporate management or a voice in decision-making processes
  •           Denying minority shareholders access to documents that would help them evaluate interests when selling shares
  •           Withholding financial statements that shareholders have a right to see
  •           Denying shareholders a return on equity while refusing to buy out their shares for fair value

This type of behavior may also include efforts made to freeze minority shareholders out of the corporation instead of providing them with their fair share of an investment.

Shareholder termination

Many minority shareholders are corporate employees, although they normally do not have any control over company affairs. Employment is their return on investment because closely held corporations do not often pay dividends. The courts have held that as long as the expectation of employment is found to be reasonable, continued employment constitutes shareholder interest. A corporation must be careful about terminating employees when it may appear that there may be an ulterior motive of freezing out minority shareholders.

Litigation

After termination, a minority shareholder may have trouble selling the shares of stock he or she owns because there are often no easily accessible markets for them. This could lead a former employee to file litigation against an employer if he or she believes that the corporation has violated the shareholder agreement. A judgment of shareholder oppression or breach of fiduciary responsibility may be very costly for a company.

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