Do you own stock in the company where you work? If so, did you carefully read the shareholder agreement that you signed and the back of your stock certificate? You may be surprised to learn that you agreed to terms detrimental to your rights.
At Gardner Employment Law, we are experts in business litigation and equity ownership. Read more if you want to learn about your rights as a minority shareholder.
Pay Close Attention to Your Shareholder Agreement
When employees receive shares of stock, typically the company requires an employee to sign a shareholder agreement. You may assume that you can trust the company and that it’s not necessary to read the shareholder agreement. Nothing could be further from the truth.
We had a client who did not realize that his shareholder agreement contained adverse terms. The back of the stock certificate referenced other contracts. Within the body of those contracts, various statements made it impossible for the client to sell his shares when he left the company.
As we discussed in a previous blog article, “Do Stock Options Have Restrictions,” the back of a stock certificate can contain terms that cause the shares to be worthless if the shareholder leaves the company. That is what happened to this client. He had hoped to have a long fruitful career with the company. But when he left, he realized that he could not recoup the money that he had invested in purchasing stock.
It is crucial that you consult an expert contract lawyer before signing important legal documents and that you carefully read all documents before you sign them. Finding out later may be too late. Know what you are agreeing to do by your signature. At Gardner Employment Law we have seen many cases involving worthless options and buyback restrictions that forced the terminated employees to sell their shares for mere pennies – or for nothing. Don’t skim the fine print. Otherwise, you could lose a lot of money.
What Are My Rights in Texas as a Minority Shareholder?
The Texas Business Organizations Code Section 21.218 codifies that shareholders who have owned shares for at least 6 months or who own at least 5% of outstanding shares have a right to examine corporate records. Also, minority shareholders have the right to vote and to be heard at shareholders’ meetings. The corporate records include information such as:
- The certificate that confirms the company’s formation;
- Books and records which detail the company’s financial affairs;
- The company’s federal, state, and local tax information or income tax returns for each of the six preceding tax years;
- The percentage or other interest each shareholder owns, including those within classes or groups such as the board of directors;
- The company’s agreements;
- An executed copy of any powers of attorney;
These documents can provide useful information to help you decide whether to sign any binding contract. This is especially important for closely held corporations, as they are not listed on any exchange. You also can exercise this right if you want financial information about the value of your shares.
Aside from a right to review the records of the company, you may have rights to be paid certain sums of money. You may have the right to receive dividends, which allows you to receive a cut of the company’s profits. Note, however, that the decision regarding whether to pay dividends to shareholders rests with the company. If the company does not pay dividends, you may receive higher returns with via capital gains when you sell the stock.
Do Minority Shareholders in Texas Have the Right to Vote?
Shareholders are the “owners” of the company. Every owner of stock is entitled to a voice in owner-level decisions. You may vote to:
- amend bylaws,
- amend wording on certificates,
- merge (or not) with another company,
- sell all or substantially all a corporation’s assets other than in the ordinary course of business,
- wind up the company’s business or revoke winding up,
- select and remove board directors,
- increase or decrease total number of authorized shares,
- change the par value of shares,
- change rights of shares,
- create a new class of shares,
- change already declared dividend,
just to name a few of those decisions.
Every stockholder is entitled to a proportional share of the vote on each such decision. The right to vote, in particular, has long been recognized as one of the “incidents” of stock ownership. The reality is that a minority shareholder will likely always be out-voted by those in control of the corporation. However, minority shareholders have a voice and a right to participate in the process.
How Can a Minority Shareholder Exercise Rights Under Texas Law?
The primary way for minority shareholders to exercise their rights is to attend all shareholders’ meetings and vote. Minority shareholders have the right to be heard. It is the opportunity to persuade other shareholders to change their votes. The law requires a corporation to hold an annual shareholders’ meeting and to provide advance notice of the meeting to each and every shareholder. Each stockholder has a fundamental right to meet periodically with the other shareholders, to have the opportunity to confront management, and to vote on the directors and other matters in a proceeding where the vote of every share of the same class will be counted the same. A minority shareholder’s right to a voice in corporate affairs is more than the right to be outvoted — it is the right to be heard by other shareholders who may be influenced by your statements.
Minority shareholders can exercise control over the corporation to the extent of the voting rights they own. For example, if a group of shareholders acquire enough to vote together on an issue, regarding a proposed merger for example, the group may be able to cancel or delay the merger. This is important since mergers can sometimes dilute the value of shares.
We represented another client who owned shares of stock in the company where he was employed that merged with another company. During the course of the merger, the value of the stock for the new entity was significantly diluted, causing shareholders to lose money. This fact was not fully explained to the shareholders. The client had heard about the issue and came to me for advice. Fortunately, this company was traded on the stock exchange. I searched through SEC filings and discovered the misrepresentation. After I wrote to the company’s lawyer quoting from the SEC records, the company settled the claim very quickly.
Overall, while minority shareholders have few rights in Texas, the directors and officers act on behalf of the corporation and must act with impartial and respectful treatment to all shareholders. This has been established law in Texas for over one hundred years, that a corporation holds a fiduciary duty to its shareholders. The company must act in a fair manner and act in the best interest of the entire business.
What Is Minority Shareholder Oppression?
Minority shareholder oppression occurs when shareholders who own fewer shares are ruthlessly disregarded by the majority shareholders, those owning more shares. Minority shareholder oppression can manifest in several ways, such as:
- Isolation from management decisions,
- Termination of employees that are minority shareholders,
- Dilution of interests, or
- Restriction from transfer of interest.
Texas statutes do not address minority shareholder oppression. In Texas, when making decisions on behalf of the corporation directors and officers may disregard any input from minority shareholders altogether. Remember that all decisions are judged by whether the directors and officers made the decision in the company’s best interest. Most often, a decision that negatively impacts minority shareholders will be upheld in court based on a fact finding of “best interest” of the company.
If minority shareholders experience oppression, they may seek restitution by proving that the decision-maker breached its fiduciary duty to the company, such as self dealing by the decision-maker. Minority shareholders may claim illegal behavior or wrongdoing by the majority shareholders, or that they made business decisions that did not represent the best interests of the company. The results turn on what trial lawyers call “findings of fact,” that is, facts showing that more likely than not the directors or officers committed these wrongs. Not an easy task, I can say as a lawyer who has handled hundreds of trials.
What If I Know About Breach of Fiduciary Duties?
If you witness a breach of fiduciary duty or wrongdoing at your company, you have the right to report financial wrongdoing or even file a claim under the federal Sarbanes Oxley Act. Some examples of breaches include misusing company funds, sharing trade secrets, profiting at the expense of the company, and failing to exercise contractual duties.
If you do not believe that reporting the problem to upper management will correct the problem, your next option would be either filing a claim in court or contacting local authorities. Reporting the problem to management does not give you a whistleblower’s claim since Texas does not recognize a whistleblower’s claim against a private corporation. While you may not have a state claim, there are a myriad of federal whistleblowers statutes.
Do You Want to Exert Your Rights as a Shareholder?
Shareholders rights is an exceedingly complex area of the law. Asking questions at work sometimes can place you in a position of peril. At Gardner Employment Law we observe the protections afforded by the attorney client relationship by being discreet and attentive to your needs. If you need guidance about your stock agreement or shareholder rights, we are standing by.