Minority Shareholder Rights and Transfer of Ownership
When specified in operating agreements or other contracts, many closely held companies allow for the transfer of ownership under certain conditions or at definitive times in the company’s lifecycle.
This can be a complex transaction, one that has the real possibility of becoming contentious for a host of reasons.
When you are denied the opportunity to transfer your ownership in a closely held company, you may have a cause of action to enforce that right.
Closely Held Company Minority Shareholder Rights and Transfer of Ownership
Here are some key considerations for minority shareholders regarding transfer of ownership in a closely held corporation:
Right of first refusal - Governing documents may give the company or majority shareholders a right of first refusal before minority shares can be sold.
Share transfer restrictions - The company may have contractual restrictions prohibiting or limiting transfer of minority shares.
Consent requirements - The company's bylaws or a shareholder agreement may require consent of the directors or majority owners before share transfers.
Illiquidity - There is generally no ready market or fair value for minority shares in a closely held company. Finding a buyer can be difficult.
Valuation disputes - The minority and potential third-party buyers may contest the fair market value of the shares.
Funding obligations - The company may have redemption or buyback obligations triggered by the minority owner's transfer.
Loss of S corporation status - Transfers need to be limited to eligible shareholders in order to maintain S Corp tax status.
Loss of shareholder rights - Certain minority shareholder rights may not transfer automatically to the new owner.
Tax implications - The transfer could trigger capital gains taxes or gift taxes based on the structure of the transaction.
Future role in company - The minority shareholder may lose any role in the company after transferring shares.
Hopkins Centrich, Your Shareholder Oppression Law Firm
Hopkins Centrich PLLC provides cutting-edge, high-quality, creative legal solutions for minority shareholders in Texas Closely Held Corporations when their rights have been abused by the majority owners. Our attorneys and staff have decades of experience in virtually every aspect of business law in The Woodlands and Texas. We have designed and incorporated businesses, managed their every legal concern, engaged in litigation on their behalf, aided with mergers and acquisitions, managed mergers, acquisitions, and sales.
Hopkins Centrich knows Texas business law. We are uniquely positioned to help shareholders when they have ample cause to believe their rights are being violated. When we work with a client, our sole focus is on them. We take advantage of everything technology has to offer in order to optimize how we work. That gives us more time to spend with you, more time to understand the issues, and more time to negotiate and prepare for trial.
We get that no one wants to contact a law firm unless they feel they absolutely have to. When they do, it almost always means that ‘things have reached a head.’ The attorneys and staff of Hopkins Centrich understand what you are going through. We will make the process understandable; you will know what is happening with your case every step of the way, and you will never have to track us down for answers.
What to Do If You Think Your Minority Rights are Being Violated
First, do not believe anything you read online, or listen to someone who tells you that the Texas Supreme Court did away with Shareholder Oppression lawsuits. The Court merely limited some of the basis for bringing a Shareholder Oppression action. There are still many avenues to relief available, particularly where the majority shareholders have made decisions that are not In the best interests of the business.
Don’t wait. If you think your shareholder rights have been trampled on don’t hesitate to call. Don’t hope that things change, don’t let a matter fester, don’t try to solve the problem yourself through emails and letters and not-so-calm conversations. Contact us. The earlier you do, the better, there are deadlines for every legal action. The longer you wait, the fewer your legal options.
Your Options When Your Right to Transfer Ownership Are Blocked
If the majority owners in a closely held corporation block a minority shareholder's proposed transfer of their shares, there are some potential options:
Review transfer restrictions - Carefully review the company bylaws, shareholder agreements, right of first refusal provisions, and other governing documents to understand the basis for the block.
Request waiver - The minority shareholder could request the majority owners waive any transfer restrictions or consent requirements that are blocking the transfer.
Offer right of first refusal - If that right exists, the minority shareholder could officially offer their shares to the majority owners first before seeking a third-party sale.
Seek partial transfer - The minority shareholder may request approval for a partial transfer of some of their shares if a complete transfer is blocked.
Negotiate release of restrictions - The minority shareholder could try to negotiate with the majority owners to release restrictions on share transfers.
Litigation - As a last resort, the minority shareholder may sue to overturn unreasonable transfer restrictions that amount to oppression or breach of fiduciary duty.
Request buyback - If available, the minority shareholder could invoke buyback/redemption rights forcing the company to purchase their shares.
Petition for dissolution - In extreme cases, blocked transfer coupled with other oppression may justify petitioning for judicial dissolution.
Offer incentive - The minority shareholder could propose incentives like offering a right of first refusal in future transfers to induce the majority owners' consent.
How We Work
Hopkins Centrich is a team with a deep bench. All our attorneys have extensive litigation experience which they fully use when necessary.
Hopkins Centrich’s attorneys also have ‘big firm’ backgrounds. They formed our firm with the goal of retaining the best and most talented lawyers who would provide a greater and more personal experience for our clients.
We do this by using technology to its fullest. We utilize cutting-edge business processes and methodologies to assure that we can continue to deliver the highest quality legal services to our clients. This, in turn, allows us to respond promptly and efficiently to client needs, exceed project requirements, operate effortlessly with narrow timeframes, and develop innovative yet flexible legal solutions at competitive fees.
We are creative. We are agile. We quickly adapt to rapidly changing circumstances, including changes in the law.
Hopkins Centrich is dedicated to upholding the rights of minority shareholders. If you feel you are not being treated right and you are invested in a closely held company – money, time, labor, experience, intellectual property, etc. – please call us as soon as possible.
Our vision statement may sum it up best. We deliver highly skilled, ethical and aggressive legal representation to every client by:
- Responding promptly to our clients’ needs.
- Anticipating business and legal trends that may affect our clients.
- Managing our clients’ matters in an efficient, caring and proactive manner.
- Communicating regularly and clearly with our clients.
