Dilution of Ownership

If you own 20% of a corporation, you might expect that you will always own 20% of that company, unless you decide to sell your stock. However, the other shareholders might vote to issue additional stock to new owners, which can result in your ownership percentage going down. When this occurs, there has been a “dilution of ownership.”

Under the law, this dilution of ownership may be completely legal. In most corporations, there is no protection against dilution, although such provisions can be added to a corporation’s bylaws or incorporated into a shareholders’ agreement. However, even when there is no absolute right to prevent the issuance of additional shares to other owners, a minority shareholder may be able to take action to prevent dilution. Usually, these minority shareholder rights arise when the new stock is being issued as part of a plan to deprive a minority shareholder of his or her proportionate share of ownership or to force the minority shareholder to sell his or her stock for less than fair market value. In determining whether that is the case, one must examine all of the facts and circumstances of the stock offering that caused the dilution.

Key issues will include:

  • Whether the new owners paid a fair price for the new stock
  • Whether the directors of the corporation attempted to maximize the cash received for the stock through any type of bidding or negotiation
  • Whether the corporation had a legitimate business reason for the transaction

Contact Powers Taylor today.

If you have suffered from a dilution of ownership, or if a corporation is threatening to dilute your ownership stake, the lawyers at Powers Taylor can help you to evaluate your rights and determine the best (and most cost efficient) way to protect your investment.