Differing Views Regarding the Definition of Oppression
Current Issues in Closely Held Businesses Series: Part 3
The same conduct that can result in a breach of fiduciary duty of those in control to a minority shareholder will often support a claim for oppression. See Part 2 of the Current Issues in Closely Held Businesses Series, Termination of Employment Versus Breach of Duty, for a discussion of a breach of fiduciary duty.
Shareholder oppression has been recognized as a statutory action since an early version of the Illinois Business Corporation Act in 1933. The Illinois statute was used to develop oppression as the basis for involuntary dissolution of the corporation contained in versions of the Model Business Corporation Act (MBCA).
The Illinois language and subsequent MBCA provisions, Section 14.30 and 805 ILCS 12.56, provide that a court can dissolve a corporation if "the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent." A version of the MBCA with this language exists in more than half the states.
However, the term "oppressive" or "oppression" is not defined in these statutes.
A shareholder may claim that removal and any resulting cut-off from profits, denial of participation in decision making, lack of discussion in alleged performance failures, absence of notice of shareholder meetings or lack of any attempt at negotiating while pushing an unfair buyout constitutes conduct that is oppressive of the shareholder's interests.
A shareholder also may claim one or more of the examples of conduct that would be a basis for a claim of a breach of fiduciary duty, such as attempts to squeeze out the shareholder, siphoning off benefits by the majority, denial of financial benefits, ignoring notices and failure to hold shareholder meetings.
Usually, the defendants will attempt to put on some evidence of good faith or argue that their actions were within their corporate authority and subject to the business judgment rule.
A number of formulations have been developed to determine whether conduct is "oppressive" and warranting a remedy.
Some jurisdictions take the position that oppressive conduct is conduct that is "burdensome, harsh and wrongful conduct, a lack of probity and fair dealing in the affairs of the company to the prejudice of some of its members, or a visible departure from the standards of fair dealings and a violation of fair play on which every shareholder who entrusts money to a company is entitled to rely." It is more than negligence or a lack of reasonable care; it is a lack of probity.
With this approach, the focus is on the behavior of the majority as well as the denial of benefits. Harsh or unfair conduct in the circumstances can be an influential element in the finding of oppression.
The exclusion from profits, lack of meetings, defendants taking benefits or resources for their own benefit, surreptitious conduct, inflammatory email and notes, lack of notice of grievances, etc., can demonstrate that the actions were not in good faith.
In the face of such claims, defendants have tried to convince courts to use a more exacting standard of "oppression." The assertion is that the remedy of "dissolution of a corporation is a drastic remedy and the court should resort to this only to prevent irreparable injury, imminent danger of loss or a miscarriage of justice." In effect, more extreme conduct should be the measure of the conduct, as the remedy of "dissolution" is a drastic action. Frequently, a party will call it the "death of the corporation." As an extreme remedy, the predicate acts should be equally extreme.
It is interesting to note that the position of this more exacting standard has lost ground over the years. It is likely that the availability of alternative remedies to dissolution, either included in the statute governing "oppression" or within the equitable authority of the courts, has led to a lower bar on conduct that would be considered "oppressive." In effect, with less drastic remedies available, the court can find a basis for relief for conduct not rising to irreparable injury, imminent danger of loss or a miscarriage of justice, and not have to resort to dissolution.
Rather than a focus on the behavior of the majority, another view of oppression is thought of as the "reasonable expectation" doctrine. The focus here is on whether the majority has frustrated or violated a reasonable expectation of the minority.
This doctrine has several elements:
- The minority shareholder has a particular expectation at the time of investment or as the relationship developed
- The expectation is objectively reasonable under the circumstances
- The expectation was central to the interests of the minority
- The expectation was known by the majority
This doctrine or approach has been developing and may become the majority view of evaluating conduct as oppressive. The practical effect in many instances is likely to be the same as the approach that focuses on the probity of the conduct of the majority.
In either approach, with a finding of oppression, the court is presented with the need to determine a remedy.
More Posts in this Series
- Part 1: Key Issues that Arise from Closely Held Businesses
- Part 2: Termination of Employment Versus Breach of Duty
- Part 3: Differing Views Regarding the Definition of Oppression (You are currently reading Part 3)
- Part 4: Determining a Remedy After Oppression or Breach of Fiduciary Duty
- Part 5: Buy Out at Fair Value
- Part 6: Determining Date of Valuation and Subsequent Implications
- Part 7: Further Observations on Fair Value: FAED, the Fair and Equitable Discount