minority shareholder oppression

Disguising Dividends as Bonuses Evidences Minority Shareholder Oppression

Minority shareholder oppression scenarios are typical. An individual joins a closely-held business as a minority owner and employee. The understanding is that the benefits of ownership will compensate for the below-market salary. The company terminates the individual and, either during or after employment, the majority shareholders take actions to deprive him of the reasonably expected benefits of ownership. This often includes lining their pockets.

Minority Shareholder Oppression Cases

Minority shareholder oppression case litigation often requires analyzing the salary, dividends and bonuses paid—or not paid—to the employees and shareholders. The terminated minority shareholder/employee will no longer receive salary or bonuses. Meanwhile, the majority shareholders continue to pay themselves substantial salaries, loan themselves money at below-market rates, and pay themselves substantial bonuses.

Case Study

In White, an individual joined a start-up business as an 8% shareholder and employee. Several years later, the company fired him. Prior to his termination the company never paid significant bonuses. After his termination, he sued for oppression. He claimed the majority shareholder was taking interest-free loans and paying substantial bonuses (while not declaring dividends). After paying substantial bonuses, this majority shareholder was forcing a capital call to dilute his interests.

Among other holdings, the bankruptcy court found the bonuses were disguised dividends. The court considered two factors in their findings. Firstly, the company declared the bonuses at year-end after knowing reported earnings. Lastly, the court considered the corporate tax benefit that declared bonuses instead of dividends.

The disguised dividends, personal loans, and imposition of a post-bonus-payment capital call, led the court to find shareholder oppression and award damages. The company was ordered, at the election of the minority shareholder, to either buy out the minority shareholder or be subjected to an injunction dictating how compensation of any kind may be paid.

Protecting Your Business Interests

For more information regarding minority shareholder oppression actions and protecting your business interests, contact Rogge Dunn Group business lawyer Gregory M. Clift at 214.239.2777 or clift@RoggeDunnGroup.com.

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