Minority Oppression and the Right to Dividends

Generally, state law, including Illinois law, does not require a company to issue dividends.  Moreover, it normally is within the discretion of the board of directors of a company to decide whether to issue a dividend and their discretion is protected by the “business judgment rule.”  On the other hand, the right to receive dividends is one of the fundamental benefits of being an equity holder.  In the case of a closely held company, where there is no public market for a dissatisfied equity holder to sell his or her shares, claims for shareholder oppression and breach of fiduciary duty will come into play and offer some protection to a minority interest holder where the majority holder is improperly denying the right to dividends by: (a) stock piling cash; or (b) manipulating the company’s finances to eliminate cash through excessive salaries and bonuses, reimbursement of personal expenses, misappropriation and self-dealing transactions.

The business judgment rule is often inapplicable in withheld dividend cases for closely held companies because it typically applies only where the decision maker is a disinterested party, which is rare in closely held companies.  Likewise, a company’s interest in managing its own affairs does not include the right to substantially defeat the reasonable expectations of a minority equity holder.

Nevertheless, courts in Illinois and elsewhere have struggled with the task of balancing the competing interests of deferring to the dividend decisions of those in control on the one hand, and minority shareholders, on the other.  For example, much has been written about seemingly inconsistent rulings on this topic by courts in Texas, in particular.  See www.txbusinessdivorce.com.  For more on the subject, see Douglas K. Moll, Shareholder Oppression & Dividend Policy in the Close Corporation, 60 Wash. & Lee L. Rev. 841 (2003), http://scholarlycommons.law.wlu.edu.

(This is for informational purposes and not legal advice.)

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