Often times, minority shareholders are confronted with the question, “Do I have any rights relative to the majority shareholders?” The simple answer is “Yes”, but the extent of those rights may vary.
The size of the company (closely held company v. publically traded company) can often determine the voting power of the shareholders and how the minority interest is actually affected. Publically traded corporations normally have many shareholders who may combine their voting interest to control how the company is run. On the other hand, closely held corporations usually have one or two majority shareholders who in turn control the company, which can lead to the suppression of minority shareholder’s rights.
Unless otherwise stated in the articles of incorporation or bylaws of the company, the majority rule is used for most decisions brought before shareholders. La. R.S. art. 12:75(I). Therefore, unless the articles or bylaws allow some form of protection related to the voting interest of a minority shareholder, the minority shareholder will be at the mercy of the majority shareholder. This is especially true when it comes to electing directors and officers who control the operations of the company. As one may suspect, this control can cause a serious rift between the shareholders which often leads to a falling out.
However, Louisiana law offers some remedy for minority shareholders who feel they are being treated unfairly. One of the more gutsy options for a minority shareholder is to file a petition for involuntary dissolution of the company. La. R.S. art. 12:143. A minority shareholder may have grounds for involuntary dissolution if can prove that the directors or officers of the corporation have been guilty of gross and persistent ultra vires acts and thereby breached their fiduciary duty to the company. However, this type of action carries a very serious burden of proof and courts normally do not find directors guilty of ultra vires actions. One specific case did rule in favor of a minority shareholder and ordered involuntary dissolution of the company because the minority shareholder proved that the majority shareholders, who were also serving as the directors of the company, had conducted ultra vires activities. Gooding v. Millet, 430 So.2d 742 (La. App. 5th Cir. 1978). The court in Gooding determined that the corporate officers were guilty of gross and persistent ultra vires actions because the officers failed to issue stock certificates, failed to hold annual meetings, failed to keep adequate financial records and paid themselves substantial salaries without a from the shareholders.
Another way a minority shareholder can flex their muscle is through a writ of mandamus. A writ of mandamus directs a corporate officer to perform their required duties. La. C.C.P. art. 3861. These required duties include the recognition of rights of the shareholders or some other obligation required according to the bylaws of the corporation. La. C.C.P. art. 3864. One of the more common mandamus actions is the shareholders’ ability to inspect financial records of the corporation. This type of action is regularly enforced by Louisiana courts. Feil v. Greater Lakeside Corporation, 31 So.2d 520 (La. App. 5th Cir. 1/26/10). A mandamus action lets the controlling shareholder(s) know that the minority shareholder is aware of their rights and is not afraid to use the legal system to enforce those rights.
The above remedies are two examples of the rights provided to minority shareholders under Louisiana law. While being a minority shareholder can be frustrating at times, it is important to remember that you do have options. If you have any questions concerning your rights as a corporate shareholder, please contact our office.