Many people are surprised to learn that a corporation is not legally obligated to pay out its profits in the form of dividends to its shareholders. Nonetheless, a shareholder is entitled to receive a proportionate share of any financial benefit that is given to its stockholders.
In privately-held companies where a single person owns more than 50% of the shares, that “control person” may attempt to keep all the profits, without giving minority shareholders their share. This is often accomplished by the control person declaring an excessive salary or excessive bonuses for himself or herself.
Alternatively, the control person might use the company’s cash to pay his personal expenses, or use the company’s assets in ways that benefit him personally, with no real benefit going to the company. In such instances, these types of payments can be deemed “constructive dividends,” and may trigger the right for minority shareholders to receive distributions that are proportionate to their ownership percentage.
Majority owners may also withhold dividends in an effort to “squeeze out” a minority owner, especially when the corporation makes a tax election to have its profits flow through to the individual shareholders. In such circumstances, a minority shareholder may owe income taxes on profits that the minority shareholder never received. Faced with tax liabilities — and no prospects for receiving cash distributions to pay those tax liabilities — the minority shareholders may be forced to consider selling their stock back to the majority owner at a price far below the fair value of the stock. When this occurs, the minority shareholder may be able to bring an action against the majority shareholder.
We can help.
If you are a shareholder in a privately-held corporation where dividends are being wrongfully withheld, we may be able to help. Contact lawyers Powers Taylor today for a free case evaluation.