DAVID V. GOLIATH- Rights of Minority Shareholders

Just because someone may not hold a majority interest in a corporation does NOT mean they are without rights with regards to the operation of the company.

  1. General rules of governance
    • All management is vested in directors[1]
      • Directors are elected by shareholders[2]
        1. Unless there is a provision in the articles of incorporation directors are elected one at a time
        2. Unless there are provisions in the articles of incorporation or bylaws to the contrary, directors are elected by majority vote.
      • The number of directors[3]
        1. Must be at least one
        2. Established in Articles of Incorporation or bylaws
        3. Can be changed by vote of Shareholders[4]
        4. Unless there are special provisions in the Articles of Incorporation or Bylaws each share get one vote[5]
      • Directors can be removed by majority vote of shareholders with, or without cause[6]
    • Directors appoint and/or remove officers[7]
    • Because they are charged with operation of the company[8], directors (or the officers to whom they delegate such authority) hire, fire and determine salaries for employees.
    • Unless otherwise specified in the Articles of Bylaws:
      • Action can be taken by the Board if a majority of the Board is present[9]
      • The Board acts by majority vote of those present[10] (NOTE: a quorum must be present for action to be taken)
    • By virtue of control of the election/removal of directors, who are charged with company operations, majority shareholders control the operation of the company.
  1. ALL shareholders have the right to access, inspect, and copy business records of the corporation[11]
    • These records include minutes of meetings
    • These records include financial and accounting records
  2. Opportunities for abuse of minority shareholders
    • Operational issues
      • Excessive salaries/benefits
      • Withholding distributions (dividends)
      • Self-dealing
    • Sale of the company’s assets or a dispositive merger[12]
  1. Protections for minority shareholders
    • Operational issues
      • Directors and officers duty to the corporation and ALL shareholders[13]
        1. Actions must be in good faith
        2. Actions must be, in reasonable belief of the director/officer to be in the best interests of the corporation
        3. There has to be a reasonable basis for decisions being made[14]
      • Minority shareholders can sue for damages or injunctive relief if directors or officers fail to meet this level of care[15]
    • Sale or dispositive merger
      • A corporation cannot sell or otherwise dispose of substantially all of its assets (other than in the normal course of business) without a vote of BOTH the directors AND the shareholders[16]
      • Unless ALL of the directors[17] AND at least 90% of the shares eligible to vote[18] are in favor of the transaction, and sign minutes to that effect, there must a physical meeting of directors and shareholders to discuss the transaction.
      • Shareholders who vote against the sale or dispositive merger have the right to have their shares purchased by the corporation at “fair value”[19] and if necessary can get their legal fees paid by the corporation[20].
    • SAMSON Option-dissolution of the business
      • A court can order the dissolution of the corporation if it finds[21]:
        1. The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break and the deadlock is injurious to corporate business affairs.
        2. The directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.
        3. The corporate assets are being misapplied or wasted.
      • A dissolved corporation cannot carry on ANY business EXCEPT as appropriate to liquidate its business assets and activities[22]
        1. After payment of all creditors, assets are distributed to shareholders (pro-rata)[23].
        2. NOTE: some assets (like intellectual property) may have to be valued and distributed “in-kind” to shareholders.
      • In lieu of a judicial dissolution, the remaining shareholders can purchase the complaining shareholder’s shares at “fair value”[24]

Contact the Kreamer Law firm, P.C. at 515-727-0900 or info@kreamerlaw.com if you need assistance in dealing with shareholders of your company.  

 

[1] Iowa Code 490.801(2)
[2] Iowa Code 490.803(3) Unless there is a provision in the articles of incorporation, directors
[3] Iowa Code 490.803(1) and (2)(a)
[4] Iowa Code 490.803(2)(a)
[5] Iowa Code 490.721(1)
[6] Iowa Code 490.808(1)
[7] Iowa Code 490.840(1) and 490.843(2)
[8] Iowa Code 490.801(2)
[9] Iowa Code 490.824(1)(a)
[10] Iowa Code 490.824(3) Accordingly, each member of the board has an equal vote.
[11] Iowa Code 490.1602(1)
[12] Abuse could be selling on terms which wind up benefitting the majority shareholders; or refusing to sell on terms which could benefit minority shareholders. A dispositive merger is where the company owned does not survive.
[13] Iowa Code 490.830(1) and Iowa Code 490.84.(1)
[14] Directors and officers have a duty to make decisions with the care that a person in a like position would reasonably believe to be appropriate. See Iowa Code 490.830(2), 490.831, and 490.832(3). This confers some responsibility to investigate the factual basis for the decisions being made.
[15] Iowa code 490.831, and 490.842(3).
[16] Iowa Code 4901202
[17] Iowa Code 490.821(1)
[18] Iowa Code 490.704(1)
[19] Iowa Code 490.1301 et. seq.
[20] Iowa Code 490.1331
[21] Iowa Code 490.1430(2)
[22] Iowa Code 490.1405(1)
[23] Iowa Code 490.1405(1)
[24] Iowa Code 490.1434