The headlines about the millions in bonuses paid to AIG executives with our tax dollars have struck a chord with many people. But for minority shareholders of many small, closely held businesses, this issue has struck a raw nerve because it is reflective of what is going on in their own business. How could the situation at a huge conglomerate like AIG that has taken billions in bailout money bear any resemblance to the inner workings of a construction company, or small manufacturer, owned by just a handful of people?
One would expect that certain sacrifices would have to be made by those in charge of such businesses in today’s dismal economy. If revenues are down twenty percent, forty percent, or even more, one would think that salaries, bonuses and certain perks would have to be reduced. However, those in charge of running and operating small, closely held businesses often simply refuse to decrease their own salaries when such a cut clearly warranted; worse, they keep taking huge bonuses that the company can no longer afford. In fact, the sight of one majority shareholder (who sets his own salary, of course) recently driving away from a car dealership in a brand new Mercedes was considered by one of his minority shareholders to be the “last straw;” litigation is about to be filed.
Such a circumstances is no less galling than what is happening in the national economy, and in some respects is even worse. While the AIG situation angers taxpayers in general because of the greed involved, it does not take money directly out of anyone’s pockets; it only does so indirectly. However, for a minority shareholder of a company where the majority keeps sucking as much money out of the company in salary and bonuses as it did before the economy turned sour, the financial impact is direct, acute, and sometimes devastating.
What can be done about such greed? If a majority shareholder refuses to recognize economic realities and takes money out of the company that it can simply no longer afford, that could be considered a breach of fiduciary duty. It could also be considered mismanagement or oppression (under New Jersey law), entitling a minority shareholder to have his or her shares valued and bought out by the majority. And while it may seem that the current economic cycle may not be a good time to sell one’s shares, such a valuation does not necessarily have to reflect a “minority discount,” and may also be adjusted upward to account for the fact that the majority shareholders have been bleeding the company dry. Please refer to other articles on this website regarding valuation issues.