Being part of a family-owned or closely-held business can be rewarding, but when things turn sour, the experience can become
turbulent. Often, a minority shareholder or passive investor can find him or herself locked out from any meaningful participation in the business, or that the business is being mismanaged by a controlling member. If this happens to you, you may be losing more than just control—you may also be missing out on financial gains that should be yours.
While your rights as corporate shareholder, officer or director, or member of a Limited Liability Company will vary depending on the company’s formational documents, there are remedies available to all aggrieved minority owners who wish to turn things right.
For example, controlling shareholders and officers and directors of closely-held corporations, owe each other and the company the fiduciary duties of loyalty and fair dealing. The Illinois Limited Liability Company Act (“LLC Act”) imposes similar duties upon members of member-managed LLCs. This fiduciary duty prohibits obvious malfeasance like stealing from the company, as well as other misconduct such as self-dealing and usurping a corporate opportunity.
Shareholders of non-public corporations and members of LLCs also have the right to demand an accounting as to the company’s business under the Business Corporation Act of 1983 (“BCA”) and LLC Act, respectively. Section 12.56 of the BCA provides other remedies to shareholders of non-public corporations, such as the removal of a director, an award of damages, or even the dissolution of a corporation in extraordinary circumstances. An individual member or shareholder can bring an action directly against the controlling member or the entity itself, or may bring a derivative action on behalf of the entity as a whole.
Many minority owners who find themselves locked out – or suspect that more serious misconduct is occurring – don’t want to rock the boat, especially where family or long-term business relationships are involved. However, inaction will almost certainly fail to solve the problem, and such a person would be wise to be proactive in making sure they are getting everything they should out of their business.
Mark L. Evans, Business Law Partner