Minority Shareholder Rights in a Closely Held Company, Share of Profits
Minority shareholders in closely held companies do, of course, share in the profits of the company. Or should. There may be no single more contentious area of business law and closely held companies than sharing profits. Anyone even remotely aware of the history of the recording and movie industry knows that some of the highest selling albums and highest grossing films of all time showed ‘no profits’ at the time.
This right is yours as a minority shareholder. When profits are denied to you by the majority shareholders or you’re told there are none, you may have a cause of action to compel them to pay.
Scrutinizing company net profit is an important part of protecting the economic interest of minority shareholders in a closely held corporation. It is an important part of understanding the financial health of the company in which you have invested. Problems with profitability should be addressed immediately.
What a Minority Shareholder’s Right to Profits Means
Here are some key considerations regarding net profit and minority shareholders in a closely held corporation:
Right to share in profits: Minority shareholders have a right to share proportionately in company profits through dividends. Net profit plays a key role in determining dividend amounts.
Scrutinizing expenses: Minority shareholders should scrutinize company expenses that reduce net profit, as controlling shareholders may approve unjustified expenses to reduce dividends.
Excessive executive compensation: Salaries, bonuses, and benefits paid to majority shareholders can significantly impact net profit available for distribution.
Personal expenses paid by company: The company paying personal expenses of the majority shareholders lowers net profit.
Corporate opportunities: Usurping profitable opportunities for personal gain reduces the company's net profit.
Financial statement analysis: Reviewing audited/unaudited financials helps assess if net income is being accurately calculated and reported.
Tax implications: Tax treatment of net profit varies for C corps versus S corps and affects minority shareholder returns.
Profit shifting: Contracts with affiliated entities controlled by majority shareholders can be used to shift net profit away from the company.
GAAP compliance: Failure to comply with Generally Accepted Accounting Principles (GAAP) could distort net profit reporting.
Litigation rights: Minority shareholders may litigate if reduced net profit results from fraudulent accounting, self-dealing, excessive executive pay, etc.
Asset valuations: Manipulation of asset valuations on the balance sheet can improperly increase/decrease reported net profit.
Here are some additional considerations for minority shareholders regarding net profit in a closely held corporation:
Inventory accounting: Inaccurate inventory costing and counting techniques could distort net profit.
Changed accounting methods: Shifting accounting methods or estimates could inconsistently impact net profit between fiscal periods.
Revenue recognition: Improper revenue recognition like channel stuffing can inflate net profit.
LIFO versus FIFO: The inventory costing method used affects cost of goods sold and net profit.
Depreciation methods: Accelerated depreciation decreases net profit relative to straight line depreciation.
Capital expenditures: Excessive capex and asset purchases funded by profits reduce net profit in the current period.
Reserve manipulations: Altering reserves for bad debts, warranty costs, etc. can change reported net profit.
Unrecorded liabilities: Omitting liabilities like pending lawsuits from books understates expenses and overstates net profit.
Window dressing: Temporarily altering financial statement items near year-end to improve appearance of net profit.
Minority shareholder agreement: Contractual net profit rights protections for the minority may be advisable.
Important: Always remember that the specific shareholder right to profits depends on the corporation's governing documents and the laws of the state in which it is incorporated.
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.
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.
