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Minority Shareholders: Their Rights and the Problems They Face

INTRODUCTION TO THE "SQUEEZE-OUT"

In many small companies the individual or group who own the majority of stock shares may try to remove the minority shareholder from the company or reduce his or her ownership percentage. This desire to reduce the influence of the minority shareholder can occur for a variety of reasons. The majority shareholders may have differing ideas about the direction of the company; personality issues may have appeared, or the majority shareholders may just wish to retain more control of the company and its profits. Throughout this series we will detail some of the common methods that majority shareholders use to destroy a minority shareholder's value in the company and what rights a minority shareholder has when this happens.

There are several ways of removing a minority shareholder from the company against his or her will, including wrongfully terminating the employment of the minority shareholder, withholding distributions from the minority shareholder, withholding corporate records and access to information from the minority shareholder, diluting the minority shareholders' shares, and forcing a share buyout at a low price fixed by the majority shareholders. Majority shareholders can use a combination of these methods to make the minority shareholder's value in the company worthless.[1] This is known as a majority "squeeze-out" of a minority shareholder.

In all of these situations, however, it is important to note that under Georgia law, in any corporation or limited liability company[2] each member owes a fiduciary duty to the other members. A fiduciary duty is the requirement to deal in good faith with the other shareholders and to protect their interests. Thus, should the majority shareholders take one of these actions without a valid business purpose, the majority shareholders may have breached their fiduciary duties to the minority shareholder, giving rise to a variety of claims under Georgia law for the value of their shares.

The risk of a squeeze-out appears most often occurs in a closely held company that only has a few shareholders. Many small businesses fall into this category. This is contrasted with large widely held companies on a stock exchange like Microsoft, Apple, etc. These larger companies have the benefit of having a sizeable number of shareholders and oversight from a board of directors. A closely held company is unlikely to have these advantages for a minority shareholder, as the board of directors will likely be made up of the majority shareholder and the people he or she selects as officers. This kind of board of directors can create a situation where there is an imbalance of power among the shareholders concerning the direction and management of the company. If the majority shareholders control the board and, with it, the decision making of the company, minority shares are less marketable, because any prospective buyer will be entering a situation where her or she has no control in the running of the company- not something that many people are willing to do.

As stated above, this imbalance in power and lack of marketability can create a situation where the shares of the minority shareholder are worthless, and a squeeze-out can begin. Throughout this series we will detail some of the common methods that majority shareholders use to destroy a minority shareholder's value in the company and what rights a minority shareholder has when this happens.



[1] F. Hodge O'Neal & Robert B. Thompson, Oppression of Minority Shareholders and LLC Members, § 3:1, rev. 2nd ed. 2004.

[2] Argentum Int'l., LLC v. Woods, 280 Ga. App. 440, 634 S.E.2d 195, 202 (2006) (stating "It is well settled that corporate officers and directors have a fiduciary relationship to the corporation and its shareholders and must act in good faith."); Internal Med. Alliance, LLC v. Budell, 290 Ga. App. 231, 236-37, 659 S.E.2d 668, 673 (2008) ("Managing members of an LLC owe fiduciary duties to the LLC and its member investors. See OCGA § 14–11–305(1) ("A member or manager shall act in a manner he or she believes in good faith to be in the best interests of the limited liability company and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.")"); but see L. Andrew Immerman & Bryan N. Baird, The Georgia LLC Act: Recent Developments and Future Possibilities, 6 J. Marshall L.J. 565, 577-78 (2013) ("Delaware's LLC Act permits the complete elimination of fiduciary duties, but the contractual covenant of good faith and fair dealing-a contract law concept-remains under Delaware law and presumably the law of Georgia. Georgia places a floor on the duty of members and managers, but the floor is low indeed. Duties and liabilities of a member or manager cannot be eliminated or limited "[f]or intentional misconduct or a knowing violation of law; or . . . [f]or any transaction for which the person received a personal benefit in violation or breach of any provision of a written operating agreement."48 In addition, "[t]he member or manager shall have no liability to the limited liability company or to any other member or manager for his or her good faith reliance on the provisions of a written operating agreement, including, without limitation, provisions thereof that relate to the scope of duties (including fiduciary duties) of members and managers.").

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