What Rights do Minority Shareholders or Minority Partners Have?

Employees who are also minority owners of the business can be terminated from employment in the business - just like any at-will employee - at any time for any reason. The problem is that the termination may devalue the interest in the business.

In the absence of an agreement between the shareholders, partners or members (of an LLC), the situation is usually thrust into the court system to resolve. Courts will first look to any agreements between the parties (if any exist). There are certain protections under the Illinois statutes which protect minority owners or partners which the courts will consider. Then the courts will consider the equities of the situation and balance the right of the majority owners to manage the business against their fiduciary duties to the minority owner. This analysis usually favors the majority owners unless the majority owners are breaching their fiduciary duties to the other shareholders. If you have any questions regarding the legal aspects of partnership, contact the Chicago business lawyers at Bellas & Wachowski for further guidance.

In the case of a partnership, the minority partner is at a minimum entitled to a return of their capital investment and perhaps the full appraised value of the business, including good will.

However, the terminated shareholder who finds themselves excluded from the business risks losing not only their investment, but the job it was intended to secure. In the absence of an agreement, the minority shareholder must look to the Illinois Business Corporation Act and the doctrine of fiduciary duty for any protection.

Under Illinois corporation laws, the majority shareholders and directors are required to control and manage the business in their discretion subject to existing laws and without any fraudulent actions or other actions which controvert the rights and interests of the corporation or of a shareholder. This is referred to as the business judgment rule and is frequently invoked in shareholder derivative actions in which the minority shareholders accuse the officers or directors of mismanagement of the business to their own benefit. One court has stated that shareholders in close corporations must discharge their management and stockholder responsibilities in conformity with a strict good faith standard. They may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other shareholders and to the corporation. Donahue v. Rodd Electrotype, 328.N.E.2d 505 (1975).

It is the concept of fiduciary obligations owed to the minority shareholders that limit the actions of officers, directors, majority shareholders, and even majority blocs of shareholders. Cafeas v. DeHaan & Richter, 699 F.Supp. 679 (N.D.Ill. 1988).

This is a highly complicated area of law. Lawsuits designed to protect the interests of minority owners vary in degree of complexity and theories. Each business is unique and the facts of one case may present other alternatives. In summary, it is highly recommended that minority owners insist on a written partnership, shareholder or member agreement before buying into or participating in a business. The agreement should include provisions for the valuation of the minority interest in the event of a termination of employment.

In the absence of an agreement, the minority shareholder should look for assistance from competent and experienced business litigation lawyers to enforce their rights as minority owners. If you need additional information, contact George Bellas at 847.823.9030 Ext: 219 or george@bellas-wachowski.com.