Although there is no general obligation for a corporation to pay dividends to its shareholders, the failure to pay dividends when the corporation is profitable may be actionable. If the majority owner uses his control over the corporation to ensure that corporate profits are distributed to him in a form other than dividends, the minority shareholders may have a claim for shareholder oppression.
A majority shareholder who wants to avoid paying dividends to the minority shareholders can manipulate the corporation's affairs to make his distributions of profits appear to be something other than dividends. If the majority shareholder is also an employee, he may grant himself a year-end "bonus" that is based on profits. The majority shareholder may also be siphoning off profits by having the corporation pay his personal expenses (vacations, personal credit card expenses, etc.), or by placing members of his family on the corporate payroll, even though those persons perform no work for the corporation. The majority owner's salary itself - if it is disproportionate to comparable salaries - may be a means of siphoning off his share of the profits, while refusing to pay dividends to the minority shareholders.
When the corporation makes a federal income tax election that causes all shareholders to report their share of corporate income on their personal tax returns, the failure to pay dividends can leave a minority shareholder with insufficient cash flow to pay his taxes. In such circumstances, the failure to make dividends can be part of an oppressive scheme to force the minority shareholder to sell his shares. In such cases, the minority shareholder may be able to take action to stop this form of shareholder oppression.
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