If you are a shareholder in a small company, you have certain rights – regardless of the percentage of company stock you hold. By the same token, if you are considering a major investment in a small company, or contemplating a tender offer as part of a move toward developing a controlling interest in the enterprise, you will want to tread carefully in order to ensure that your business activities are in full compliance with all state and federal rules and regulations pertaining to securities trading. In other words: Understanding the rights of minority shareholders is an important part of risk management and business strategy, regardless of whether you are a minority shareholder or simply need to be mindful of the regulatory considerations that the rights of minority shareholders may bring into play. Many of these regulatory concerns, and most rights for minority shareholders, will apply to some extent regardless of the size of the company, but some special considerations may apply in smaller companies that have a limited number of shareholders. In these companies, sometimes known as “closely held” corporations, the outsized influence that any single shareholder's activities may have on the value of other shareholders' investments can demand a greater degree of consideration for the rights and interests of fellow shareholders that approaches the nature of a fiduciary duty. 

Whatever your point of entry for reviewing the rights of minority shareholders in small companies, a Louisiana attorney with Business Law Group may be able to help you understand which regulatory requirements may apply to your situation, and assist you in evaluating your options for navigating these concerns. Call (504) 446-6506 today to set up a consultation.

What Does It Mean To Be a Minority Shareholder?

Generally speaking, all shareholders in a company will have some rights guaranteed under federal laws governing securities and investments, while states may also impose their own laws for shareholder protection; in Louisiana, for example, RS § 12:1-1435 guarantees the right of an “oppressed” shareholder to withdraw. In some cases, shareholders may enjoy a separate set of rights, established not by state or federal regulations but by the terms of the contract between the company and those who purchase stock in it; however, these contract terms are in general more likely to favor majority shareholders than their counterparts who own a smaller proportion of the company's stock.

As a 2015 article in the Louisiana Law Review points out, minority shareholders are particularly in need of regulatory protection due to the relatively limited influence they are able to exert over a company's direction and business practices. In any corporate business structure, many of the administrative and operational decisions undertaken, whether transformative or merely quotidian, will be in the hands of the majority shareholders, whose voting stock allows their opinions to carry outsized weight. As the 2015 article – written partly in response to the enactment of the Louisiana Business Corporation Act (LBCA), which aimed to provide legal remedies for some of the potential harms minority shareholders might experience – points out, the damages to minority shareholders can be especially pernicious in “closely-held” corporations.

When Small Companies Are Closely Held Corporations

Small companies are, like other companies, subject to the basic requirements of contract law and securities regulations in their applicable jurisdictions. However, small companies are much more likely than large ones to meet the criteria for a “closely-held” corporation, which Cornell Law School's Legal Information Institute (LII) describes as one whose shares are owned by an individual or a small group of shareholders; the closely-held corporation is a very common structure for small family businesses. Due to the circumstances under which these corporate boards are formed, it is not uncommon to encounter situations in which no single shareholder controls a majority of a small company's stock.

For this and other reasons, minority shareholders can sometimes have an influence over the affairs of the closely held corporation that they would not expect to exercise over those of a larger company. LII goes on to note that when a company's shares are distributed among such a small group, the potential for a single shareholder's actions to substantially impact the value of other shareholders' stock that some courts have held shareholders in closely held corporations to owe one another a “fiduciary duty,” similar to the mutual obligations assumed by partners in a partnership business structure. In some jurisdictions, the minimum number of members for a corporation's board of directors is specified by law. L.R.S. § 12.224 establishes as the minimum within this state the lesser of three “natural persons” (distinct from legal “persons,” which are sometimes business entities) or as many directors as there are members in the corporation.

Industry-Specific Regulations

Sometimes the regulations that pertain to a particular industry will make special provision for the rights of shareholders, and especially the rights of minority shareholders, with respect to the management and operations of businesses in that industry. In Louisiana, state banking regulations outlined in L.R.S. § 950.7 prohibit out-of-state savings and loan companies or associations from purchasing shares of any Louisiana association or savings and loan “holding” company equal to more than 10% of the organization's voting or equity, except under specific circumstances.

Among those circumstances is a “tender or exchange offer” made by the prospective purchases to the parties holding all of the company's equity or voting privileges. A “tender offer,” according to the Securities and Exchange Commission (SEC), is a “public bid” inviting company shareholders to sell their stock. According to Investor.gov, these offers fall under the purview of the SEC, which subjects such offers, and any transactions arising from them, to intense scrutiny. Distinct requirements may apply depending on whether the offer is designed to purchase equity vs. debts and whether equity securities sought for purchase are subject to the provisions of Section 12 of the Securities Exchange Act of 1934. Out-of-state companies can make tender offers for shares of a Louisiana association or savings and loan company without violating § 950.7, but in this instance, the offer will instead come under strict SEC oversight.

Seek Assistance Navigating Complex Regulatory Landscapes

Whether you are a minority shareholder seeking to understand and enforce your rights in the face of potential mismanagement or to defend your interests against the possibility of a stock buyout that might adversely affect the value of the stock you own in a small company or, on the other hand, an investor seeking to make advantageous stock purchases while remaining within the rules put in place by state and federal laws, becoming familiar with the rights of minority shareholders in companies of every size can help to set you up for success in the next stage of your business journey. To seek assistance navigating the relevant regulatory frameworks, or to consult with an experienced business law attorney in Louisiana who may be able to help you evaluate the legal implications of your current position and the options you are exploring, schedule a consultation with Business Law Group. You can reach our New Orleans office today by calling (504) 446-6506.