Minority shareholders often do not work at the company, and are not involved in management, making them, for lack of a better word, “passive investors.” While no broad rule can ever be applied to everyone, it is these types of minority shareholders who are the most vulnerable to abuse by the majority shareholders.
The easiest way for a passive minority shareholder to be abused is for the majority shareholders to keep increasing their salaries and bonuses to the point that they are significantly above market rates. Instead of paying out distributions to shareholders – which, of course, are paid proportionately to share ownership – the money is sucked out of the company and paid to the majority only.
This and other forms of minority shareholder oppression can sometime be prevented by nothing more than vigilance by the minority shareholder. Ask to see financial records. Insist that annual shareholder meetings take place, even if there are only three of you. In other words, let the majority shareholder know that, at the very least, you are watching them. This does not mean that the relationship should or must be confrontational. But being someone who keeps an eye on his or her investment is always a good idea.
For example, majority shareholders often start with a car being paid for by the company. Then, the company pays for his car insurance. Then, his wife’s insurance, followed by his wife’s car payments, followed by his kids’ cars. It happens all the time. By the time a truly passive minority shareholder comes to my office complaining about such abuses, the path to shareholder dispute litigation has already been paved. Most minority shareholders in that situation wish they had a time machine so they can nip such behavior in the bud. Abuses like this are much less likely to occur if the majority shareholders know they are being watched.
Stated differently, whether it is an employee in a store, a manager, or a majority shareholder of a small to medium-sized company, people are more likely to abuse their power if they know no one is watching them. So, even if you are a passive investor, watch the majority shareholders. Politely, without interfering in the business. But watch them.