Corporations are owned by their shareholders. Larger corporations, like those that are publicly traded, are generally managed and run by a board of directors that oversees their day-to-day operations. In smaller corporations, the shareholders and directors are often the same people or entities. When shares aren’t evenly held, there can be power disparities.
In this article, we will discuss:
- What is the difference between majority and minority shareholders?
- What is a closely held corporation?
- What is a statutory close corporation in Wisconsin?
- What protects minority shareholders in Wisconsin?
What Is The Difference Between Majority And Minority Shareholders?
A minority shareholder holds less than 50% of a corporation’s shares of stock. A majority shareholder holds over 50% of the corporation’s shares—and a majority of the power. Individual minority shareholders have little power because they lack majority control. On the other hand, a majority shareholder can often ignore the opinion of minority shareholders when major decisions require that the shareholders vote.
Depending on the distribution of shares among shareholders, there may be no clear majority shareholder. In those situations, groups of shareholders will tend to have influence over the corporation’s decisions. However, when there is a majority shareholder, minority shareholders risk being completely ignored when it comes to impacting corporate decisions.
What Is A Closely Held Corporation?
Closely held corporations are generally corporations where the group of shareholders is small. Unlike a large, publicly traded corporation, there is usually more overlap between the shareholders and the board of directors. This means that the shareholders will tend to have more involvement in the day-to-day operations of the company. In the event that there is a majority shareholder, then that individual or entity will effectively control the major corporate decisions. Majority shareholders tend to hang on to their power, so there is little chance for a minority shareholder to change their status.
What Is A Statutory Close Corporation In Wisconsin?
Wisconsin state law allows corporations with 50 or fewer shareholders to be designated as statutory close corporations. (Wisconsin Statutes §180.1801-180.1837.) This status provides protections against the transfer of shares in the corporation, among other advantages. In a statutory close corporation, the transfer of shares is prohibited without the consent of the other shareholders. A refusal to consent does not completely prevent the sale of shares—they must be submitted to a process where the other shareholders have the ability to purchase the shares before a third party may do so.
Corporations that are run by a small group of people may want to elect to be a statutory close corporation because the restrictions on selling shares can prevent an unwanted third party from joining the corporation. This may be valuable to businesses that want to keep their core decision makers constant. Statutory close corporations can also operate without a board of directors or bylaws so long as they comply with the statute’s requirements. This can make operating a corporation simpler and more efficient, while still providing the liability protections of a corporation.
What Protects Minority Shareholders In Wisconsin?
Because they lack power, minority shareholders are at risk of being oppressed by the majority. Oppression usually takes the form of the majority making business decisions that benefit itself, without regard to the minority shareholders. Minority shareholders have a right to examine the financial records of the corporation—refusing them access is an example of minority oppression. Another type of oppression is where the majority diverts corporate funds to itself rather than the minority shareholders. For example, increasing executive pay to majority shareholders rather than paying out dividends that might benefit the minority can be oppression.
In some situations, minority shareholders may be able to file suit to protect their rights. These types of lawsuits, known as derivative actions, are generally filed by the shareholders on behalf of the corporation. Some situations may allow shareholders to bring lawsuits on their own behalf. It depends on whether the harm is primarily against the corporation or specific shareholders. These types of lawsuits are risky, and minority shareholders pursuing them should be prepared to litigate.
When a corporation is about to engage in a merger or other significant change in status, a vote of the shareholders is required. A majority shareholder can force a sale of the company. In some situations, a minority shareholder may not object. When a shareholder objects to such a transaction, then dissenter’s rights under the Wisconsin Statutes apply. (Wisconsin Statutes §180.1301-180.1331.) The statute provides a process for dissenting shareholders to give notice that they dissent to a transaction and demand payment for their shares if the transaction is completed.
One of the simplest ways to protect shareholder rights is to have contractual protections in place. The terms of the shareholder agreement can be crafted to protect minority shareholders by giving them rights to offset their lack of voting power. For example, a right of first refusal could give minority shareholders the ability to match an offer for the sale of the corporation or another shareholder’s assets. Other provisions could limit the vote threshold for some corporate actions to a super-majority (66% of the shares). This may prevent certain actions from being forced solely by the majority—such as decisions to dissolve the company.
The corporate attorneys at O’Flaherty Law of Wisconsin are available to help you. Contact us at (414) 253-2080 or info@oflaherty-law.com for more information or to schedule a consultation.
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