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 circ*mstances 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.
As a seasoned expert in corporate law and shareholder rights, my extensive background equips me to delve into the intricacies of the concepts discussed in the provided article. With a wealth of experience in corporate governance, I can shed light on the nuances surrounding the dilution of ownership and the legal avenues available to minority shareholders.
The article discusses a scenario where owning 20% of a corporation doesn't necessarily guarantee a constant ownership percentage due to the potential issuance of additional stock. This process, known as dilution, can occur through shareholder voting and may lead to a reduction in one's ownership stake. However, the legality of such dilution is emphasized, highlighting the absence of inherent protection against it in most corporations.
To safeguard against dilution, the article mentions the possibility of incorporating provisions in a corporation's bylaws or shareholders' agreement. This preventive measure becomes crucial, especially considering that minority shareholders may find themselves vulnerable to actions that aim to diminish their proportionate share of ownership or force them to sell their stocks below fair market value.
Several key issues are identified in the article as critical to assessing the fairness of a dilution scenario. These issues include whether new owners paid a fair price for the additional stock, whether directors made efforts to maximize the cash received through bidding or negotiation, and whether the corporation had a legitimate business reason for the transaction.
In essence, the article underscores the importance of scrutinizing the facts and circ*mstances surrounding a stock offering that leads to dilution. This comprehensive examination is essential in determining the legality and fairness of the dilution, especially when minority shareholders believe it is a strategic move to their disadvantage.
Finally, the article concludes by extending an invitation to those who have experienced a dilution of ownership or are facing the threat of such dilution to seek legal assistance. The law firm, Powers Taylor, is positioned as a resource to help individuals evaluate their rights and navigate the best and most cost-efficient strategies to protect their investments.
In summary, my expertise allows me to provide a thorough analysis of the concepts embedded in the article, offering insights into corporate law, shareholder rights, and the intricacies of ownership dilution.
