Protecting Minority Shareholder, Minority Member Rights in Michigan Corporations and LLCs.
This guide outlines your minority owner rights, describes the wrongful conduct for which you can seek relief in court, and discusses the available remedies, including damages and a buy-out at full fair value.
Background- Triggering EventsInformal interactions among owners of small businesses often make it difficult for those with little or no control -- such as minority owners -- to protect themselves and their interests. In many cases, small businesses are the brainchild of friends and relatives who trust one another, and operational and financial control changes as ownership transfers because of inheritance, divorce, new investors or changes in loyalties and alliances.
What is Shareholder Oppression?Owners with controlling interest have the ability to oppress minority stakeholders in a variety of ways and advance their own agendas. But many common types of shareholder or member oppression are grounds for legal action under the Michigan Business Corporation Act. A few examples of actionable conduct include interfering with voting rights, withholding information or dividends, eliminating employment or benefits, self-dealing or conducting unfair business transactions with other companies they own, making loans with high interest rates to the company, snagging for themselves business opportunities in the company's line of business, voting for unreasonable compensation for themselves or making improper capital calls -- requesting funds from investors -- and other bad-faith maneuvers to dilute and freeze out minority ownership.
How To Protect Your InterestsMinority owners have to protect themselves by hiring a lawyer, who specializes in closely held business law and can review and draft key documents that will govern the operation. Articles of incorporation, bylaws, and operating agreements are minority owners' first line of defense, and must be tailored to suit each situation. They can cover voting rights for electing directors and amending documents, powers and limitations of directors and managers, classes of ownership, and regulations for capital calls and dilution, and many other issues. Provisions controlling the transfer of stock also can be very important in protecting minority holders. Still, minority owners must know the business of the company by attending shareholder meetings, asking questions, and reviewing notices and documents. Shareholders have a statutory right to receive company balance sheets, income statements, and sources and application of funds. Shareholders and members have a statutory right to financial and other pertinent information.
Should You File a Lawsuit?The Michigan Business Corporation Act permits a shareholder to sue if the acts of directors or others exercising control are "illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder," which means "a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder." This broad language in the statute could include almost any unfair activity, including termination or other limitations on benefits that disproportionately affect the shareholder; self-dealing; usurping corporate opportunities; or keeping information from minority owners. Actions specifically authorized by the articles of incorporation, bylaws, or consistently applied written policies or agreements, however, are not subject to court action. Michigan's circuit courts have far-reaching powers to fashion a remedy. They can dissolve the company, order a buyout at a fair price, undo or prohibit unfair acts, and award damages and attorney's fees. But it's up to shareholders and members to ensure their legal rights are protected.