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Case Law Update: What are Acts of Shareholder Oppression?

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In Stephanie (Younger) Waters v. G&B Feeds, Inc. and Wiliam Younger, No. SD29745, March 4, 2010, the Missouri Court of Appeals upheld the trial court's finding of shareholder oppression, showing that a pattern of oppressive acts is key to the cause of action.  The trial court recited a medley of actions taken by Appellant-Defendant which the trial court considered to be acts of shareholder oppression:


[h]e assumed control of the corporation and the operation of its business without lawful authority and in complete disregard for the rights of [Respondent]. He borrowed money and refinanced debts on his own without consultation with [Respondent]. He testified that throughout the term of the business he purchased livestock feed at cost for [his] herd of 500-600 head of livestock, a substantial savings over a period of six years. However, the court has no evidence, other than [Bill’s] testimony, as to any such amounts paid for feed. He declined the opportunity to pay [Respondent] $70,000[.00] for her stock, the amount she had paid for it, and thus be in a position to have complete ownership of the corporation and the lawful right to operate the corporation business as he was doing without lawful right. He refused to cooperate in the sale of the business property to the ultimate financial detriment of both shareholders. He retained all rental receipts from the storage units and gave no accounting therefore. He has totally failed to give a proper accounting of his stewardship of the business affairs.

 

The Court of Appeals went on to hold that there was "sufficent evidence supporting the trial court's determination that [Appellant-Defendant] breached his fiduciary duty to Respondent in his dealings with her and in his operation of the affairs of [the company]"  and upheld the trial court's finding of minority shareholder oppression.

For the entire decision, click here.

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Shareholder Oppression in New York

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Applicable Statute

New York State’s corporate dissolution statute, NY Business Corporations 1104-a, provides for the involuntary dissolution of a corporation when the “directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders” in a company that is not publicly traded.

New York courts have held that oppressive conduct is distinct from illegal or fraudulent conduct, and thus also a reason for corporate dissolution. 

What is Oppressive Conduct?

In an “oppression” case, the first inquiry of a New York court will be to determine whether the complained of acts are actually “oppressive.”  Though the dissolution statute does not define what oppressive acts are, one of the leading cases on the subject, Matter of Kemp & Beatley, Inc., interprets them as actions which “substantially defeat shareholder expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decisions to join the venture.”  This standard is widely followed.

Oppressive conduct is most often found when there are a number of actions that, when taken together, have the effect of denying the minority shareholder benefits from the company that he or she had the reasonable expectation of.  Often the Court will look at what is motivating the majority’s actions and whether there is an effort to “freeze out” or “squeeze out” the minority. 

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What is Shareholder Oppression?

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The “shareholder oppression” doctrine is a set of legal principles that protect minority shareholders from abuse by the majority.  As such, these principles stand in direct contradiction to the central rule of corporate decision making that the will of the majority governs.  The doctrine also runs contrary to and can prevail over several other well established legal principles, including the business judgment rule, the employment at will doctrine and derivative claims distinction.  More on these later.

The principles protecting the rights of minority equity owners are articulated and implemented differently from state to state, and their implementation often involves a balancing of the rights of the majority to control the business entity’s destiny and the rights of the minority to receive the often unarticulated benefits they anticipated when they joined the enterprise.  The rules may vary within a state depending on the type of entity, as well. 

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Limitations on Majority Rule in the Management of Business Entities

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The general rule in the corporate governance of business entities -- including corporations, limited liability companies and partnerships -- is that absent an agreement or statutory requirement to the contrary, majority rule governs.  Indeed, majority equity owners often assume that they can do pretty much anything they want with regard to the business entity. 

However, this is an erroneous assumption.  Over the years, many legal principles have evolved which limit the freedom of the majority  to do as they wish. 

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Protecting Trade Secrets – Basic Practical Considerations

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The protection of trade secrets involves a combination of business and legal acumen.

The best way to protect a trade secret is not to disclose it to anybody.  This should be the default position – keep it secret!  But, in the real world, that is rarely possible or practical.  Often, trade secrets must be disclosed to be able to benefit from them.

Trade secret disclosures can generally be broken down into three categories: (1) Disclosure to employees; (2) Disclosure to potential strategic partners and (3) Disclosure to potential sources of financing.