Squeeze-Outs & Minority Shareholder Rights in Minnesota

April 1, 2013

This post is part of a series of posts related to Minnesota minority shareholder rights. The following posts cover specific issues related to minority shareholder rights:

The preceding section gave a brief overview of the various techniques by which persons controlling a business venture may deprive minority shareholders of their interest in the business or of a fair return on their investment. Majority shareholders of a corporation, through their capability to elect and control all or most of the directors and to determine the outcome of shareholders’ votes on other matters, have great power to use a great variety of strategies or methods to give themselves an advantage at the expense of minority shareholders. Over the years, these methods have become to be called squeeze-outs.

Squeeze-outs commonly affect the minority investor’s cash flow from the venture while attempting to increase the cash flow of the controlling shareholders; at the very extreme end, the minorities’ cash flow will be sealed off completely through elimination of their shareholder status. There are a variety of methods a controlling shareholder may employ to manipulate returns:

  1. dividend withholdings;
  2. excluding minority shareholders from company employment and the board of directors;
  3. appropriation of corporate assets;
  4. usurping corporate opportunities;
  5. self-dealing;
  6. dilution of shares by issuances of stock; and
  7. withholding information.

In addition, controlling shareholders my attempt to squeeze-out minority shareholders through methods aimed at reorganizing corporate governance, such as:

  1. eliminating cumulative voting;
  2. amending stock transfer restrictions;
  3. arrangements relating to corporate meetings; and merging with or be acquired by another corporation.

One of tell-tale signs of an ongoing squeeze-out is the decrease of participation in decision making process affecting corporate governance. Another is the poorly justified or unexplained negative changes in cash flows. Before considering employing any of the remedies discussed in the next section, the first step should always be the seeking of more information about the issue from other shareholders/members of the corporation or the LLC. If this proves to be ineffective, seeking counsel from an attorney will often prove to be the best path to preserving your investment and insuring some form of redress. Any legal remedy, if a freeze-out is identified, will often avoid the “result that allows majority shareholders to reap a windfall by buying out dissenting or oppressed shareholders…[as a] corporate squeeze-outs is contrary to the statutory purpose to provide a remedy to minority shareholders.” Advanced Communication Design, Inc., 615 N.W. 2d at 292.

This article was written by Dmitriy Bondarenko.

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