Individuals who are minority shareholders in a closely held corporation can find themselves in a difficult position when a situation arises where there are management and/or operational decisions being made which they disagree or in which their voice is not being heard. While a shareholder in a publicly traded corporation could simply sell his/her shares for the current market price, there is no established market price for shares of closely held corporations. Instead, minority shareholders in a closely held corporation are forced to rely either contractual provisions and/or the applicable statutes to determine (1) if they have the ability to exert greater control on the management and/or operation of the corporation or (2) how they can best divest themselves of their shares and what those shares are worth.
Under Florida law, there are certain circumstances where a shareholder has a right to petition for dissolution the corporation in which they own an interest when there are deadlocks in the management of the corporation, when corporate assets are being wasted; and/or when those in control of the corporation are acting illegally or fraudulently.
Florida law also provides that a shareholder in non-publicly trades corporation have the right to dissent from some corporate actions. In exchange, those shareholders have right to receive an appraisal of the “fair value” of their shares.
Further, in some circumstances, Florida law provides a shareholder and/or a group of shareholders the ability to take either direct legal action against the corporation and/or its directors/officers seeking to recover the lost value of their shares or derivative legal action on behalf of the company (and, by extension, the shareholders) seeking to recover assets and/funds that were improperly lost due to the controlling directors/officers self-dealing, improper apportionment of dividends/distributions, and/or waste.
However, pursuing a dissolution or appraisal action can result in a significant discounts to the fair value of the price of a minority shareholders shares, and thus, an individual that finds themselves in such a situation where they are considering pursuing a claim for an appraisal or dissolution or believe they may have grounds to pursue a direct or derivative action should consult an attorney to determine what is their best course of action.
DISSOLUTION
When can a legal action for dissolution of a corporation be filed?
Generally, a shareholder can pursue a legal action for dissolution of a corporation when either (1) the directors of the corporation are in an unresolvable deadlocked in the management of the corporate affairs and irreparable injury to the corporation is threatened or being suffered; or (2) when the shareholders are deadlocked in voting power. Additionally, a shareholder in a corporation having 35 or fewer shareholders pursue a legal action for dissolution of a corporation when either (1) corporate assets are being misapplied or wasted, causing material injury to the corporation; or (2) directors or those in control of the corporation have acted, are acting, or are reasonably expected to act in a manner that is illegal or fraudulent.
A creditor of a corporation can pursue legal action for dissolution of the corporation when either (1) the creditor’s claim has been reduced to judgment, which was not satisfied, and the corporation is insolvent; or (2) the corporation has admitted in writing that the creditor's claim is owed and the corporation is insolvent; or
Additionally, the corporation itself can pursue legal action for voluntary dissolution under the court’s supervision.
Furthermore, the Florida Attorney General’s office includes the Department of Legal Affairs, which can take action to dissolve a corporation when either (1) the corporation obtained its articles of incorporation through fraud; or (2) the corporation has continued to exceed or abuse the authority conferred upon it by law.
How could dissolution of the corporation resolve my issues?
If the court did agree that there were proper grounds to dissolve the corporation, the corporation would be dissolved, and individual minority shareholder would receive their portion of the funds remaining after the corporation’s assets were sold and its debts satisfied.
Additionally, rather than allow the corporation to be dissolved, the corporation itself or another shareholder/group of shareholders, can elect to purchase the petitioning minority shareholder’s shares for the “fair value” of those shares. In such situations the corporation and/or purchasing shareholders will likely seek discounts to the value of the minority shareholders shares for their lack of ownership of a controlling interest and/or for lack of marketability of the shares to be applied to the fair value of the shares. However, there are arguments regarding why such discounts should not be applied that can be made on the minority shareholder’s behalf.
APPRAISAL
When can a legal action for appraisal of a minority shareholder’s shares be filed?
Under Florida law, a shareholder in a corporation in a non-publicly traded corporation is entitled to appraisal rights and to obtain payment of the fair value of that shareholder’s shares in the event the shareholder exercises his/her dissenters’ rights in to a major corporate decision such as a merger; share exchange; disposition of corporate assets; or amendment to the corporation’s articles of incorporation. However, the same appraisal right is not available to shareholders in corporations whose shares are publicly traded, as they have the ability to simply sell their shares on the existing markets.
How could appraisal of my shares in the corporation resolve my issues?
If the court did agree that there were proper grounds for the appraisal of the minority shareholders shares the corporation, there would hear argument on the value of the shares in the corporation and determine the value. In such situations the corporation will likely seek discounts to the value of the minority shareholders shares for their lack of ownership of a controlling interest and/or for lack of marketability of the shares to be applied to the fair value of the shares. However, there are arguments regarding why such discounts should not be applied that can be made on the minority shareholder’s behalf.
DIRECT OR DERIVATIVE LEGAL ACTION
When can a direct or derivative legal action be filed?
Although a shareholder has a personal stake in the company and suffers a personal loss when the company loses value, this does not always entitle the shareholder to bring direct action. The issue of whether a shareholder can directly bring an action against the company and/or its directors/officers personally or whether it must be maintained as a derivative suit for the benefit of the corporation/other shareholders is a complex question. Determining whether the minority shareholders loss is compensable via direct suit or derivative action requires a look at the issues surrounding the loss of value.
In general, a direct action may only be brought if there is a direct harm to the minority shareholder which is separate and distinct from those sustained by other shareholders. Generally, a derivative action is appropriate when there is a loss of assets and/or harm to the corporation that effects all or a group of shareholders, but management of the corporation refuses to take action.
How could direct or derivative legal action resolve my issues?
Since claims that are brought directly are based on legal rights that belong to the individual shareholder, the minority shareholder can bring his/her own claim in their own name to vindicate a violation of legal duties owed to him/her by the corporation and its officer/directors.
Conversely, since derivative claims belong to the corporation, not the shareholder, the minority shareholder is asserting a claim on behalf of the corporation because the management of the corporation refuses to pursue a claim. In a derivative claim, the legal duties are owed to the corporation and not the shareholder, and thus, the legal remedy that the court awards is for the benefit of the corporation not the shareholder. However, prevailing on behalf of the corporation is still in the shareholder(s) interest, as that protects the value of his/her shares.
Please remember that this overview is being provided for informational purposes only and it is not a complete summary of the law. Thus, it is not intended to and should not be relied upon as legal advice. If you have any questions relative to this overview or other questions regarding minority shareholder oppression, you should contact an attorney. To speak with an attorney at Creed & Hall, please contact our office at (813) 444-4332.