What happens when a shareholder acts unilaterally: background check implications

Understanding unilateral actions by shareholders

How Shareholders Can Act Without Group Approval

In the world of companies and corporations, shareholders usually make decisions together, often through meetings, voting, or written consent. However, sometimes a shareholder—especially one with significant voting power or majority control—may act alone, bypassing the usual approval process. This is known as a unilateral action. These actions can include appointing board members, filling board vacancies, or making decisions about the company’s direction without consulting other shareholders or the board.

Unilateral actions are more common in closely held businesses or when a single shareholder or a small group holds a majority of the common shares. In such cases, the controlling shareholder may have enough power to make decisions that impact the entire corporation, sometimes even without a formal shareholder proposal or committee approval. This can raise concerns about shareholder rights, especially for minority shareholders who may feel excluded or at risk of shareholder oppression.

Legal and Fiduciary Considerations

The law generally expects all shareholders, especially those with controlling interests, to act in good faith and in the best interests of the company. When a shareholder acts unilaterally, there is potential for breach of fiduciary duties, particularly if the action disadvantages the corporation minority or is not aligned with the company’s long-term business interests. Courts have addressed these issues over the years, emphasizing the importance of transparency, proper process, and respect for the rights of all shareholders.

Understanding the difference between various legal powers—such as those granted by a durable power of attorney (DPOA) versus a standard power of attorney (POA)—can also be relevant when analyzing how and when a shareholder may act alone. For more on this, check out this resource on understanding the differences between DPOA and POA.

Unilateral actions by shareholders can have significant implications for the company, its board, and its investors. The next sections will explore how these actions impact background checks, what red flags to watch for, and the risks for businesses and investors.

How unilateral shareholder actions impact background checks

How unilateral decisions shape background screening

When a shareholder acts alone—without the usual committee approval or board oversight—the impact on background checks can be significant. These actions often bypass the standard checks and balances that protect both the company and its minority shareholders. This can create unique challenges for those conducting due diligence or verifying the integrity of a business or its controlling parties. Unilateral shareholder actions might include:

• Filling board vacancies without a formal vote
• Approving transactions by written consent instead of at a shareholder meeting
• Exercising voting power to push through a shareholder proposal without broad consensus

These scenarios can complicate the background screening process. For example, a background check might reveal a history of decisions made without proper committee or board involvement, raising questions about good faith and adherence to fiduciary duties. In some cases, these actions may even be challenged in court, especially if minority shareholders allege shareholder oppression or claim that the majority shareholders breached fiduciary duties. Companies and investors need to be aware that such unilateral moves can signal deeper governance issues. When reviewing a company’s history, background checks should look for:

• Patterns of action by written consent rather than open voting
• Changes in the number of shares held or voting power without transparent disclosure
• Instances where the rights of minority shareholders were ignored or overridden

In connection with acquisition or investment decisions, understanding how a shareholder’s unilateral actions have shaped the company’s structure or business direction is crucial. This is especially true for those holding common shares or those with a minority position in the corporation. A thorough background check can reveal whether the company has a history of majority shareholders acting without proper legal advice or breaching their fiduciary duties. For more insights into how specific legal structures, like personal property trusts, can affect background checks in these situations, you can read about how a personal property trust impacts background checks.

Red flags to watch for in background checks

Key warning signs in shareholder background checks

When reviewing background checks related to unilateral shareholder actions, there are several red flags that can signal deeper issues within a company. These warning signs often relate to how voting power is exercised, the balance between majority and minority shareholders, and the adherence to corporate governance.

• Concentration of voting power: If a single shareholder or a small group holds a significant number of common shares, they may have the ability to bypass the board or committee approval process. This can lead to decisions made without broader consensus or proper oversight.
• Frequent use of written consent: While action by written consent is legal in many jurisdictions, repeated use—especially for major decisions like board vacancies or connection acquisition—can indicate a lack of transparency and potential for shareholder oppression.
• History of shareholder proposal disputes: Companies with a record of contested shareholder proposals or legal action involving breach of fiduciary duties may have unresolved governance issues. This is particularly concerning if there are allegations of breached fiduciary duty or actions not taken in good faith.
• Minority shareholder complaints: Reports of minority shareholders alleging oppression or exclusion from key decisions can be a sign that majority shareholders are not respecting the rights of others. This can escalate to court involvement or regulatory scrutiny.
• Rapid changes in controlling interests: Sudden shifts in the number of shares held or voting power can suggest attempts to manipulate company control, sometimes ahead of major business moves or acquisitions.

Patterns that raise concern

Background checks should also look for patterns over the years, such as:

• Repeated changes in board or committee members without clear justification
• Actions taken without proper legal advice or outside the scope of the law
• Decisions made without majority or minority shareholder approval, especially in closely held corporations

These patterns can indicate a culture where controlling shareholders prioritize their own interests over the corporation minority, increasing risks for investors and business partners. For more on how investigative techniques like skip tracing can uncover hidden connections or assets during background checks, see this guide to skip tracing in background checks.

Risks for businesses and investors

Potential Consequences for Companies and Investors

When a shareholder acts unilaterally, the risks for businesses and investors can be significant. These actions may bypass established procedures, such as board or committee approval, and can create legal and financial vulnerabilities for the company. Understanding these risks is essential for anyone involved in corporate governance or considering an investment.

• Legal exposure: Unilateral decisions may breach fiduciary duties or violate company bylaws, leading to court challenges or regulatory scrutiny. This is especially true if the shareholder holds majority voting power or acts without proper written consent from other shareholders.
• Shareholder disputes: Minority shareholders may claim shareholder oppression if majority shareholders use their controlling power to make decisions that harm the interests of others. This can result in costly litigation and damage to the company’s reputation.
• Board instability: Actions that fill board vacancies or change committee members without following proper procedures can undermine trust in the company’s governance. This may deter potential investors or partners who value transparency and good faith operations.
• Financial risks: Unilateral moves, such as connection acquisition or asset transfers, can impact the company’s value and create uncertainty for both current and future investors. These actions may also affect the number of common shares held and the overall voting structure.
• Regulatory and compliance issues: Companies must comply with corporate law and internal policies. Unilateral actions that sidestep these requirements can trigger investigations or penalties, especially if they involve a breach of fiduciary duties by controlling shareholders.

For businesses and investors, it is crucial to assess the background of shareholders with significant voting power or a history of acting without proper approval. This helps identify potential red flags and supports informed decision-making in corporate transactions.

Best practices for background screening in these situations

Building a Robust Screening Process

A strong background screening process is essential when dealing with unilateral actions by shareholders. Companies should ensure their procedures are tailored to detect risks related to voting power, shareholder rights, and board approval. This is especially important in situations involving majority shareholders or when a shareholder proposal is made without full committee approval.

• Verify the number of shares held and voting power of each shareholder to identify potential for unilateral decisions.
• Review company records for any action taken by written consent, which may bypass standard board or committee review.
• Assess past incidents of shareholder oppression or breach of fiduciary duties, as these can signal future risks.
• Check for court filings or legal disputes involving controlling shareholders, especially those related to board vacancies or acquisition connections.
• Evaluate whether committee members and the board have exercised good faith and proper oversight in approving major decisions.

Key Documentation and Legal Considerations

Companies should maintain clear documentation of all shareholder actions, especially those not requiring a formal vote. Keeping accurate records helps demonstrate compliance with corporation law and protects against claims of breached fiduciary duties. Legal advice is crucial when reviewing actions that may affect minority shareholders or alter the balance of power within the corporation minority.

• Ensure all shareholder actions, including those by majority shareholders, are properly recorded and communicated to all stakeholders.
• Regularly update policies to reflect changes in law or best practices regarding shareholder rights and board responsibilities.
• Consult with legal professionals to assess the impact of unilateral actions and to safeguard the interests of minority shareholders.

Continuous Monitoring and Training

Background screening is not a one-time event. Companies should implement ongoing monitoring of shareholder activities, especially when there is a change in the number of common shares or shifts in voting power. Training for committee members and the board on their duties and the risks of unilateral actions can further reduce exposure to legal and business risks.

• Set up regular reviews of shareholder records and voting patterns.
• Educate board and committee members about the signs of shareholder oppression and the importance of acting in good faith.
• Encourage a culture of transparency and accountability in all shareholder and board interactions.

Case examples of unilateral shareholder actions

Real-World Scenarios: Unilateral Shareholder Actions and Background Checks

Examining actual cases helps clarify how unilateral actions by shareholders can raise concerns during background checks. These scenarios often reveal patterns of behavior, legal risks, and governance issues that background screening aims to uncover.

• Majority Shareholder Bypassing Board Approval
  In several companies, majority shareholders have exercised their voting power to approve significant business decisions—such as acquisitions or asset sales—without proper board or committee approval. Background checks on these corporations often reveal board vacancies, irregular meeting minutes, or missing written consent documentation. These findings can signal potential breaches of fiduciary duties and lack of good faith, especially when minority shareholders allege shareholder oppression or exclusion from key decisions.
• Written Consent Used to Sidestep Minority Shareholders
  Some corporations allow actions by written consent, enabling controlling shareholders to make decisions without a formal meeting. While legal in many jurisdictions, this practice can be abused. Background checks may uncover a pattern where a small number of shareholders with majority voting power repeatedly use written consent to override the rights of minority shareholders. This can lead to court challenges, especially if the actions are perceived as a breach of fiduciary duty or contrary to the interests of the corporation minority.
• Shareholder Proposal Ignored by Controlling Interests
  In a number of cases, minority shareholders have submitted proposals to the board or committee members, only to have them dismissed by those holding the majority of common shares. Background checks may reveal a history of unresolved shareholder disputes, legal advice sought regarding voting rights, or even litigation related to shareholder oppression. These red flags can impact the perceived stability and governance of the company.
• Connection to Acquisition Without Proper Disclosure
  There have been instances where a controlling shareholder acted unilaterally in connection with an acquisition, failing to disclose material information to the board or other shareholders. Background screening can uncover discrepancies in public filings, missing disclosures, or previous court actions alleging breach of fiduciary duties. Such findings are critical for investors and businesses assessing the risk profile of a company.

These real-world examples highlight the importance of thorough background checks when unilateral shareholder actions are suspected. They also underscore the need for clear documentation, adherence to law, and respect for the rights of all shareholders to maintain trust and transparency in corporate governance.