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shareholder oppression

Shareholder oppression—also known as minority shareholder oppression, squeeze out, or freeze out—is a general term for a claim or cause of action that may be made by a minority shareholder—a shareholder who owns less than a controlling percentage of the company—and is based on the alleged unfair or oppressive treatment of the minority shareholder.

Minority shareholder oppression claims often arise in closely-held corporations—corporations that are not publicly traded; in which a relatively small number of people own most or all of the shares; and in which the shareholders are often family members or people who know each other.

Those in control of a closely held corporation may use various squeeze-out or freeze-out tactics to deprive minority shareholders of benefits; to misappropriate those benefits for themselves; or to induce minority shareholders to relinquish their ownership for less than it is otherwise worth.

The types of conduct most commonly associated with such tactics include:

• denial of access to corporate books and records;

• withholding payment of, or declining to declare, dividends;

• termination of a minority shareholder's employment;

• misapplication of corporate funds and diversion of corporate opportunities for personal purposes; and

• manipulation of stock values.

In Texas, shareholder oppression occurs when those in control of a closely held corporation engage in conduct that unfairly prejudices minority shareholders. Texas does not have a specific statute addressing shareholder oppression, but the Texas Supreme Court has recognized that minority shareholders have a common law cause of action for oppressive conduct. The court has defined oppressive conduct as actions that substantially defeat the minority shareholder's expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture. Common tactics of oppression may include denying access to corporate records, withholding dividends, terminating employment, misusing corporate funds, and manipulating stock values. Remedies for oppressed minority shareholders may include a court-ordered buyout of the minority's shares, appointment of a receiver, or other equitable relief. However, the remedies available are subject to the discretion of the courts and the specific circumstances of each case.

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