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What constitutes oppression of a minority shareholder?

Courts have held that the trial court must consider all factors in determining if a minority shareholder is being oppressed. The recurring theme in these decisions is the “reasonable expectations” of a minority shareholder.

For example, Courts have noted that when a shareholder receives his shares through inheritance the donor's wishes have some bearing on whether the donee's expectations are reasonable and that the donee's expectations as they evolve over the life of the enterprise also shape the expectations which the courts will credit. Therefore, the donor's wishes may have some bearing on whether the donee's expectations are reasonable. Ferber v. American Lamp Corp., 503 Pa. 489, 469 A.2d 1046 (1983) (court found that consideration should be given to testamentary intent of father whose will clearly indicated that benefit should flow from the family business to all children).

"Oppression" and other similar terms in state statutes provide broad amorphous grounds for relief which cannot be stated with precision in advance without destroying their utility in new and unforeseen situations. This flexibility has resulted in some courts in the past interpreting the terms narrowly and thus restricting the type of action for which relief would be granted. Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983); Balvik v. Sylvester, 411 N.W.2d 383 (N.D. 1987); Masinter v. WEBCO Co., 164 W. Va. 241, 262 S.E.2d 433, 442 (1980). Courts have come to recognize that oppression and similar statutory terms can best be construed against the background of the special nature of close corporations and the legislative purpose in enacting involuntary dissolution statutes and statutes providing other remedies, namely, to give greater protection to minority shareholders. Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 804, 473 N.E.2d 1173 (1984) (enactment of "oppression" statute shows legislature's "special solicitude towards the rights of minority shareholders of a closely held corporation"); McCauley v. Tom McCauley & Son, Inc., 104 N.M. 523, 724 P.2d 232, 236 (Ct. App. 1986); Balvik v. Sylvester, 411 N.W.2d 383, 386 (N.D. 1987) (statutory concept is best understood by examining nature and characteristics of close corporation). As one New York court put it, "thus, to a great extent, a definition of oppression depends on the special nature of close corporation as understood by [the state corporations statute,] relevant commentators and … case law." Application of Topper, 107 Misc. 2d 25, 433 N.Y.S.2d 359 (Sup 1980). See also Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 804, 473 N.E.2d 1173 (1984) ("statutory concept of 'oppressive' action can perhaps best be understood by examining the characteristics of close corporations and the legislative purpose in creating this involuntary dissolution statute"); Exadaktilos v. Cinnaminson Realty Co., Inc., 167 N.J. Super. 141, 400 A.2d 554 (Law Div. 1979), judgment aff'd, 173 N.J. Super. 559, 414 A.2d 994 (App. Div. 1980). The court in Topper noted, "Apparently the legislators were influenced by the writings of Professor F. Hodge O'Neal, the leading authority on 'squeeze-outs' … ." Both O'Neal and other commentators have developed a definition for oppression in terms of the reasonable expectations of minority shareholders in light of the particular circumstances in each case." Application of Topper, 107 Misc. 2d 25, 433 N.Y.S.2d 359, 365 (Sup 1980). See generally Thompson, Corporate Dissolution and Shareholders' Reasonable Expectations, 66 Wash ULQ 193, 211–216 (1988) (describing the development of reasonable expectations)

In a close corporation, the parties' entire business bargain is not completely set forth in the corporation's charter or bylaws or even in a separate signed preincorporation or shareholders' agreement. The agreements "often are oral, perhaps just vague and half-articulated understandings. Even when the participants formalize their bargain in a written shareholders' agreement, their participation in the business is often grounded on assumptions that are not mentioned in the agreement." O'Neal, Close Corporations: Existing Legislation and Recommended Reform, 33 Bus Law 873, 886 (1978); Haley v. Forcelle, 669 N.W.2d 48, 58 (Minn. Ct. App. 2003), review denied, (Nov. 25, 2003). Expectations, therefore, must be gleaned from the parties' actions as well as their written documents. Courts permit expectations to be established outside of formal written agreements, but the minority shareholder has the burden of proving the existence of the expectations. Jaffe Commercial Finance Co. v. Harris, 119 Ill. App. 3d 136, 74 Ill. Dec. 722, 456 N.E.2d 224 (1st Dist. 1983); Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983).

Expectations must be important to the investor's participation. The New York Court of Appeals has stated: "oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture … [M]uch will depend on the circumstances in the individual cases." Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 73, 484 N.Y.S.2d 799, 805, 473 N.E.2d 1173, 1179 (1984). See Matter of Farega Realty Corp., 132 A.D.2d 797, 517 N.Y.S.2d 610 (3d Dep't 1987) (dissolution denied to a one-third shareholder of a corporation with a 20-unit apartment building as its only asset; court noted that petitioner's expectations were those of a passive investor).
The Oregon Supreme Court held that preventing a corporation's 49% owner from examining corporate records and failing to notify him of corporate meetings was not sufficiently serious conduct to justify dissolution or the granting of any equitable relief. Baker v. Commercial Body Builders, Inc., 264 Or. 614, 507 P.2d 387, 56 A.L.R.3d 341 (1973). As stated by the New York Court of Appeals, "[d]isappointment alone should not necessarily be equated with oppression." Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 73, 484 N.Y.S.2d 799, 805, 473 N.E.2d 1173, 1179 (1984).

Expectations must be known to the other parties. Frustration of subjective hopes and desires will not trigger relief. Thus, the North Carolina Supreme Court has recognized that "in order for plaintiff's expectations to be reasonable, they must be known to or assumed by the other shareholders and concurred in by them. Privately held expectations which are not made known to the other participants are not 'reasonable.'" Meiselman v. Meiselman, 309 N.C. 279, 298, 307 S.E.2d 551, 563 (1983). Longwell v. Custom Benefit Programs Midwest, Inc., 2001 SD 60, 627 N.W.2d 396, 400 (S.D. 2001) (no oppression found; all that the 50 pecent shareholder established was "that he made several demands, which would result in abandoning the current corporate headquarters, altering the management structure, and firing their corporate attorney and CPA. He did not successfully convince his co-equal director and was subjectively disappointed with corporate management. Rejection of these demands is not oppression in light of the history of the corporation.).

Case law in every jurisdiction suggests that this Court must consider all factors in determining whether or not oppression occurred. If corporate formalities are customarily dispensed with and the affairs of a close corporation are carried on through informal conferences, decisions reached by all the directors and shareholders at such informal conferences bind the corporation. Anderson v. Clemens Mobile Homes, Inc., 214 Neb. 283, 333 N.W.2d 900 (1983) (minority shareholder in a two-shareholder corporation who acquiesced in the majority shareholder's leasing of certain real estate to corporation held estopped from claiming that the corporation rather than the majority shareholder, owned the real estate). Brainard v. De La Montanya, 18 Cal. 2d 502, 511, 116 P.2d 66, 70 (1941); First Nat. Bank v. Frazier, 143 Or. 662, 678–680, 22 P.2d 325, 329–330 (1933); Miller v. South Hills Lumber & Supply Co., 334 Pa. 293, 6 A.2d 92 (1939); , 166 Pa. Super. 148, 70 A.2d 467 (1950); Brewer v. First Nat. Bank of Danville, 202 Va. 807, 120 S.E.2d 273 (1961); National Bank of Commerce of Seattle v. Puget Sound Biscuit Co., 61 Wash. 192, 112 P. 265 (1910); Gerard v. Empire Square Realty Co., 195 A.D. 244, 248-249, 187 N.Y.S. 306, 309-310 (2d Dep't 1921); Temple Enterprises v. Combs, 164 Or. 133, 150, 100 P.2d 613, 620, 128 A.L.R. 856 (1940).

The courts now generally hold also that all the shareholders by acquiescence may waive the requirement of a shareholders’ or directors’ meeting and impliedly authorize corporate acts to be done without a meeting. O’Neal, supra. citing Merchants & Farmers Bank v. Harris Lumber Co., 103 Ark. 283, 286-287, 146 S.W. 508, 510 (1912). Kimball v. Kimball Bros., 143 Ohio St. 500, 28 Ohio Op. 425, 56 N.E.2d 60 (1944) (directors held to have acquiesced in officers' conduct of corporate business). See also Sharon Herald Co. v. Granger, 97 F. Supp. 295, 301 (W.D. Pa. 1951), judgment aff'd, 195 F.2d 890 (3d Cir. 1952). A number of cases have held a corporation bound by acts of a majority of the directors even though no legal meeting was held. O’Neal, supra. citing Holy Cross Gold Min. & Mill. Co. v. Goodwin, 74 Colo. 532, 223 P. 58 (1924); Indiana Die-Casting Development Co. v. Newcomb, 184 Ind. 250, 111 N.E. 16 (1916); Gorrill v. Greenlees, 104 Kan. 693, 180 P. 798 (1919). “The action of a majority of the directors though acting separately, if within the scope of their powers as directors, binds the company.” Buckley v. Jennings, 95 Vt. 205, 209, 114 A. 40, 41 (1921).

A complaining party can acquiescence if they have knowledge of the action and fail to act. Hurley v. Ornsteen, 311 Mass. 477, 480-481, 42 N.E.2d 273, 275–76 (1942); and Winchell v. Plywood Corp., 324 Mass. 171, 175-176, 85 N.E.2d 313, 316 (1949). Mid-Continent Tel. Corp. v. Home Tel. Co., 319 F. Supp. 1176, 1195 (N.D. Miss. 1970); Gorrill v. Greenlees, 104 Kan. 693, 180 P. 798 (1919). Rowland v. Rowland, 102 Idaho 534, 633 P.2d 599 (1981) (waiver may be inferred from acquiescence in or knowing silence to corporate decision arrived at through an informal procedure). Pinnacle Consultants, Ltd. v. Leucadia Nat. Corp., 261 A.D.2d 164, 689 N.Y.S.2d 497 (1st Dep't 1999), aff'd, 94 N.Y.2d 426, 706 N.Y.S.2d 46, 727 N.E.2d 543 (2000) (acquiescence in challenged transactions estopped shareholder from maintaining a derivative suit). Belfer v. Merling, 322 N.J. Super. 124, 730 A.2d 434, 442 (App. Div. 1999) (shareholders failure to object to practice coupled with their benefit from the practice estops them from challenging it). See also Belle Isle Corp. v. MacBean, 29 Del. Ch. 261, 49 A.2d 5 (1946).

In Webber v. Webber Oil Co., 495 A.2d 1215 (Me. 1985), the court held that the corporate director waived her right to object to inadequacy of notice of special board meeting by failing to object to inadequacy of notice when she received it or when she attended board meeting. See also Goldfield Corp. v. General Host Corp., 36 A.D.2d 125, 127, 318 N.Y.S.2d 378, 381 (1st Dep't 1971), order aff'd, 29 N.Y.2d 264, 327 N.Y.S.2d 330, 277 N.E.2d 387 (1971) (after corporate shareholder received notice that it would not be permitted to vote its shares at annual meeting it had three weeks before the meeting to bring judicial proceeding to determine its right to vote but did not do so; further, it failed to nominate an opposing slate of directors or to solicit proxies or communicate with other shareholders; the court refused to annul the election of directors or the resolutions passed at the meeting); Grossman v. Liberty Leasing Co., Inc., 295 A.2d 749, 754 (Del. Ch. 1972) (when directors attended meeting of directors at which new directors were elected and voted for action taken and signed minutes, they waived any defect in the notice given). Schraft v. Leis, 236 Kan. 28, 686 P.2d 865 (1984) (shareholders' informal agreement setting salaries, made in disregard of corporate bylaw setting forth formal procedures to set salary levels, was held to have ratified future setting of reasonable salaries by methods other than those authorized by bylaw).

For a minority shareholder to obtain relief under the expectations analysis, he/she must prove that he/she had one or more substantial reasonable expectations known or assumed by the other participants. Meiselman, supra. at 301, 564. The case at hand is analogous to Gee v. Blue Stone Heights Hunting Club, Inc., 145 Pa.Cmwlth. 658, 666, 604 A.2d 1141, 1145 (1992). In Gee, the court observed that

The Articles of Incorporation of the club clearly state: "There [shall] be no financial gain to the members hereof." The Gees’ expectations that their memberships in the club would be held as investments for profit are unreasonable in light of the Articles of Incorporation. Other evidence cited by the trial court indicating that the Gees' investment expectations were unreasonable include the fact that Carl Gee's membership was purchased for him in 1960, 13 years after the club's incorporation for $200.00, the same price which the original members paid, and the fact that all other transfers of membership have been made for the price of $200.00 and have not included any returns, dividends or profits for memberships previously purchased.

Id. at 666. Thus, the court concluded the members of the club had not engaged in oppressive conduct because the Gees could not have reasonably expected dividends or profits. The key to remember is that shareholders of small closely held corporations need to communicate effectively and timely to avoid expensive litigation. If the matter is ever litigated the Court will look closely at the “reasonable expectations” of a minority shareholder.