Minority Shareholder Ownership After Divorce

Dividing complex property during divorce -- such as businesses and stock interests -- can be challenging. There are many factors to consider, such as the past, current and future value of the property, the economic value of intangible assets and the challenges that owning the property can pose.

This last concern is one that many people going through a Texas divorce do not fully consider. How can you ensure that the assets you receive will not become a nuisance in the future? One example of property that must be handled carefully during divorce is stock interests; namely, minority stock interests in a private company.

Oftentimes, these are concerns when acquiring minority shares as part of a divorce settlement:
- Without a redemption agreement, a company and its shareholders are not obligated to buy a minority shareholder's stock, regardless of the price.
- A minority shareholder cannot choose when to sell the interest and there is generally no market for the interest. This means that minority shareholders must often wait for either the sale of the business or an IPO (Initial Public Offering), with no other means to sell their shares.

Thankfully, there are remedies available to some individuals who have already acquired minority shareholder interests through divorce and feel they are being oppressed, either by their former spouse or another majority shareholder.

What Remedies Are Available for Minority Shareholders?

Under Texas law, minority shareholders without redemption agreements or other contractual exit rights have the legal right to exit if they can show that the majority shareholders oppressed them. In order to exercise this right, they must bring a claim for shareholder oppression.

Shareholder oppression has occurred when:
- The majority shareholder's conduct destroys reasonable expectations by the minority shareholder that were a key reason the minority shareholder joined the business; or
- The majority shareholder acted in a way that was burdensome, harsh or wrongful, lacked fair dealing in the company's affairs, or departed from standards of fair dealing.

More concrete examples include when majority shareholders:
- Do not declare dividends
- Fail to give the minority shareholder adequate information
- Use corporate money or benefits for personal benefit
- Terminate a minority shareholder's employment in the company or presence on the management team without cause

If the governing bodies of the company acted illegally, oppressively or fraudulently, the court will likely order an injunction but may, with the right evidence, order the company's liquidation.

The above information applies to corporations that are incorporated in Texas, but many corporations are incorporated in other states (Delaware, in particular). Therefore, if you have a minority shareholder oppression claim, it is very important to speak with an experienced attorney.

Should You Obtain a Minority Shareholder Interest?

As you can see from the above information, if you are considering obtaining a minority shareholder interest in a privately owned business as part of your divorce settlement, you should consider all of your options. This includes creating a contractual right to exit the company and sell your shares.

Article provided by Kerr & Hendershot, PC
Visit us at www.k-hpc.com


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