BlogBusiness LitigationBusiness-DivorceBusiness Divorce: Duty Not to Oppress Minority Shareholders

July 26, 2020by Jeffrey Davis0

One of the most common breach of fiduciary duty claims by minority stakeholders in a  company is the “oppressed stakeholder” claim.

Essentially, one argues that their reasonable rights and expectations have been substantially and utterly defeated by the other stakeholders and as such, they are entitled to some relief from the Court.

The claim arises from the concept that owners may not act for the aggrandizement or undue advantage of themselves to the exclusion or detriment of other stakeholders.[1] It “is the fiduciary duty owed by … majority shareholder[s] in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders.” 

Given the broad “reasonable expectations” test, there is no all-encompassing list of acts that can be deemed oppressive, nor will the same acts be considered oppressive in every circumstance. However, the most common and recurring forms of oppression include:

  1. The failure to declare dividends;
  2. Termination of a minority shareholder’s employment;
  3. Removal of a minority shareholder from management;
  4. Excessive compensation to the majority shareholders in lieu of distributions or dividends.
  5. Diversion of opportunities to other corporations and mergers under unfair terms;
  6. A change of policy concerning the distribution of corporate income, designed to offer no return on the oppressed shareholder’s investment in an attempted “squeeze-out.”;
  7. A shareholder who reasonably expected that ownership in the corporation would entitle him or her to … a share of corporate earnings, …, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.
  8. Efforts of majority shareholders to void a minority shareholder’s shares, falsify corporate documents, and prevent minority shareholder access to corporate records;
  9. The actions of a majority shareholder group in eliminating the petitioner and associated persons from participation in the active operation of a corporation in which they had previously participated, and in which have included they had every reasonable expectation of being able to continue to participate.

As you can imagine the analysis is fact sensitive and can be particularly messy especially where the parties’ expectations are not sufficiently laid out in well drafted business governance agreements.

Usually, someone bringing this type of claim is thinking two things: (1) how do I get rid of my business partner or (2) how do I force a buy-out. Business-divorce, business breakups, partnership disputes etc. are very complex matters. Before making a decision you should absolutely discuss the facts of your claim with a qualified attorney. This article is for educational purposes. Contact us for a free initial consultation.

[1] See Harger, 204 F.Supp.2d at 707 (citing Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 559, 483 N.Y.S.2d 667, 473 N.E.2d 19 [1984]).  

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