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Clearly, no other individual will buy the minority interest, hence the minority Shareholder remains in a powerless circumstance in spite of the ownership of stock. Assuming the corporation is Sub S in tax status (in which case each investor is taxed on business revenues personally) then the situation for the minority Investor can be desperate because the majority Investor can reward him or herself enough to pay the taxes, however not declare any dividends and the minority Investor is in the impossible situation of paying taxes on cash she or he never even receives! (Therefore if  View Details  makes $100,000 in net revenue and you own thirty percent of the stock, you must pay taxes on $30,000.

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If the business declares no dividend, you still need to pay that tax.) The above "capture play" on a minority Shareholder is an extremely normal maneuver in corporate fights and eventually forces the minority investor to offer his or her interest at any cost to the majority Shareholder in an effort to prevent economic destroy.

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Further, under the rules of cumulative ballot, a minority investor with a particular quantity of stock can assure him or herself of being able to choose a minority on a Board of Directors (a minimum of choose one out of 3) even if control still remains in the hands of the bulk investors.

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If you are destined to become a minority Shareholder, you should protect yourself in other ways: either by developing a distinct kind of stock structure permitting certain veto rights or by obtaining contractual rights in a separate written contract, either of employment, or in regards to who will serve on the Board or act as an Officer.

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It is thus at the formative phase of the corporation where minority investors need to either seek some type of increased share holdings or legal defense, as discussed at the end of this post. The 2 techniques to secure minority rights are Stock Structure (and associated ballot arrangements) and Employment Contracts.