Oppression

Oppression

In a closely held corporation, majority group has ability to take actions that are harmful to minority shareholder’s interest.

“Freeze out” or “squeeze out” techniques that oppress a minority shareholder include:

a)     Termination of minority shareholder’s employment,

b)     Refusal to declare dividends

c)     Removal of a minority shareholder from the board of directors, and

d)     Siphoning off of corporate earnings through high compensation to majority shareholder.

e)     Anything else the majority does that defeats a reasonable expectation of the minority shareholder which was central to his decision to join the venture.

Case #1: Davis v. Sheerin

Oppressive conduct defined as burdensome, harsh, and wrongful conduct – a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members, or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.

a)     NOTE: Oppressive conduct does NOT require a showing of fraud, illegality, mismanagement, wasting assets, etc.  

Common Law & Statutory Remedies:

1. Court ordered buy-out

2. Court ordered removal of director & appointment of new director

3. Removal of BOD by Shareholders

4. Removal of BOD by judicial proceeding

5. Election to Purchase in Lieu of Dissolution

6. Judicial Dissolution (Most Extreme Remedy)

Court ordered buy-out:

(1)   Where there is evidence of oppression, court can order buy-out and controlling shareholders will pay minimum fair value for stock

(2)   Occurs when less harsh remedies are inadequate to protect the rights of the parties

(3)   Especially appropriate in closely-held corp

(4)   Considers probability that the oppressive conduct would continue in the future and would not be limited to past acts of oppression

(a)   NOTE: Some states do not allow this.

Court ordered removal of director & appointment of new director

(1)   Must prove:

(a)   Director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion, with respect to the corporation, and

(b)   Removal is in the best interest of the corp.

Removal of BOD by Shareholders

(1)   Default Rule: Shareholders may remove 1 or more directors with or without cause (unless articles say can remove only w/ cause)

(2)   Director may be removed by the shareholders only at a meeting called for the purpose of removing him and meeting notice must state that purpose

Removal of BOD by judicial proceeding

(1)   Must be brought shareholders. Must show:

(a)   Director engaged in fraudulent or dishonest conduct, or gross abuse of authority or discretion with respect to the corp, and

(b)   Removal in best interest of the corp.

Election to Purchase in Lieu of Dissolution

(1)   Defendants reactive ability – not a court ordered buyout – merely provides options if a suit brought against corp to dissolve it

(2)   1 or more shareholders (bad ones who were oppressing) may elect to purchase all shares owned by the petitioning shareholders at the fair value of the shares.

(3)   Court will determine fair value

Judicial Dissolution (Most Extreme Remedy)

1. Permitted

(a)   In a proceeding by the AG if it is established that

(b)   In a proceeding by a shareholder if

(c)   In a proceeding by a creditor, or

(d)   In a proceeding by the corp.

2. In proceeding brought to dissolve corp, court can appoint a receivership or custodian to wind up & liquidate (if biz unwilling to make changes, never going to work) or to otherwise manage the biz & affairs of corp (will bring notions of equity & fairness to the corp).

(a)   In a proceeding by the AG if it is established that:

1.   Corp obtained its articles via fraud, or

2. Corp has continued to exceed or abuse the authority conferred upon it by law. 

(b) In a proceeding by a shareholder if:

(i) Directors are deadlocked in the management of the corp affairs, shareholders are unable to break deadlock, irreparable injury to the corp is threatened or being suffered, business and affairs of the corp can no longer be conducted to the advantages of the shareholders (generally bc of deadlock), OR

(ii) Directors or those in control of the corp have acted, are acting, or will act in a manner that is illegal/oppressive/fraudulent, OR

(iii) Corp assets are being misapplied or wasted