Corporations:
A Contemporary Approach
Chapter 16
Public Shareholder Activism
Slide 1
of 65
Nicolas Delille, “Oppression”
(2013)
Module X – Close Corporations
Chapter 30
Oppression in CHC
• Nature of dissension / oppression
Bar
exam
Corporate
practice
Law
profession
Citizen of
world
– Freeze out techniques
– Traditional corporate rules
• Fiduciary duties
– Equal opportunity
– Court balancing
– Traditional duties (BJR)
• Oppression statutes
–
–
–
–
Reasonable expectations
Whose expectations? and when?
Remedy: buyout or dissolution
Meaning of “fair value”
• Oppression in LLC: corporate or contract?
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 2
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Close Corporations
What if agreement -•
deviates from model?
•
does not comply with statute?
•
is unfair?
•
is incomplete (no liquidity)?
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 3
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Compare models
Partnership Model
Corporate Model
Equal rights
Share profits (accounting)
Dissolve (liquidate)
Majority control
Dividends (BJR)
Liquid - sell into market
Minority
shareholder
Majority
shareholders
Close
Corporation
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 4
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Freeze-out
How can majority
• take advantage of minority?
• get rid of minority?
Minority
shareholder
Majority
shareholders
Close
Corporation
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 5
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Two freeze-outs …
(two results)
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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Freeze-outs
Wilkes v. Springside
Nursing Home
(Mass 1976)
Minority
shareholder
Majority
shareholders
Close
Corporation
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 7
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Wilkes v. Springside Nursing Home (Mass 1976)
"... when stockholders in a close corporation
bring suit against the majority alleging a
breach of the strict good faith duty ... it
must be asked whether the controlling
group can demonstrate a legitimate
business purpose for its action .... the
controlling group ... must have some room
to maneuver in establishing the business
policy of the corporation ..."
"When an asserted business purpose for
their action is advanced by the majority,
.... we think it open to minority to
demonstrate that the same legitimate
objective could have been achieved
through an alternative course of action
less harmful to the minority's interest
".. our courts must weigh the legitimate
business purpose, if any, against the
practicality of a less harmful alternative...."
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 8
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Freeze-outs
Minority
shareholder
Majority
shareholders
Nixon v.
Blackwell
(Del 1993)
Close
Corporation
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 9
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Nixon v. Blackwell (Del 1993)
"... stockholders need not always be
treated equally for all purposes ... To
say that fiduciary principles require
equal treatment is to beg the question
whether investors would contract for
equal or even equivalent treatment ....."
"... the minority stockholders were not (a)
employees of the Corporation, (b)
entitled to share in the ESOP, (c)
qualified for key man insurance, or (d)
protected by specific provisions in a
stockholders' agreement.
"The directors' actions following Mr.
Barton's death are consistent with his
plan. An ESOP is normally established
for employees"
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
What does
“entire fairness”
apply to?
Slide 10
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1. In a partnership, a partner who
wants out:
a. Can withdraw and get pro rata
cash
b. Must get partners’ approval
c. Must have agreement to be
paid for ownership interest
2. In a CHC, a shareholder who
wants out:
a. Can withdraw and get pro rata
cash for shares
b. Must have buyout K
c. Is stuck
3. In CHC in MA, a mistreated
minority Sh…
a. Gets judicial balancing
b. Gets buyout option
c. Gets only BJR
4. In a CHC in MA, a minority sh
excluded from share tx…
a. Gets equal treatment
b. Must show unfairness
c. Gets only BJR
5. In CHC in DE, minority sh…
a. Gets equal treatment if majority
deals in shares
b. Gets judicial balancing
c. Gets BJR
6. In a CHC, minority Shs…
a. Should get p-ship rights
b. Should get only corporate rights
c. Should get hybrid rights, given
lack of liquidity
Answers:
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 11
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What “liquidity” rule for CHC?
Sam incorporates a family
business. Eventually he
retires and gives equal
shares to his two
daughters – Anna and
Bertha.
Bertha wants to move to the
big city. Can she get her
money?
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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Partnership
Any shareholder can
withdraw and
demand payment
of her fair share.
• Heatherington &
Dooley:
mandatory buyout
right (no opt-out).
• Create market for
full CHC stock by
legislative fiat.
Corporations:
A Contemporary Approach
Modified
Any shareholder who
is denied her
reasonable
expectations can
withdraw and get
paid.
• Need not
formalize
understanding
• Close corporation
= incorporated
partnership!!
Chapter 30
Oppression in CHC
Corporation
No easy out / only
majority can set
dividends or get
$$ on withdrawal.
• No partner-like
rights unless
negotiated.
• “Corporation is
corporation is
corporation.”
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Enter legislature
(stage left) …
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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MBCA § 14.30 Grounds for judicial
dissolution.
The [court] may dissolve a corporation:
(2) In a proceeding by a shareholder if
it is established that
(ii) 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
...
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Noscitur
a sociis
Slide 15
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Meaning of “Oppression”
Minority Perspective
Majority Perspective
Role control / financial
“Expectations”
Change over time
Control prerogatives
Clarity of “deal”
“Harsh, bad faith”
Minority
shareholder
Majority
shareholders
Close
Corporation
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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In re Kemp & Beatley (NY 1984)
Chief Judge Cooke:
"A shareholder who reasonably
expected that ownership in the
corporation would entitle him or
her to a job, a share of
corporate earnings, a place in
corporate management, 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.“
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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Distinguish
In re Kemp & Beatley (NY 1984)
• Long-time Eees (regular “bonuses”)
• Longtime mgmt / financial rights
• Remedy: buyout
Bonavita v. Carbo (NJ Super 1996)
• Widow of retired Eee (family member)
• No mgmt / limited financial rights
• Remedy: buyout
Nixon v. Blackwell (Del 1993)
• Non-Eee family members
• Structural limits on liquidity rights
• Remedy: none
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Prof. Doug Moll,
University of Houston
Slide 18
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NC approach …
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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NC Bus Corp Act § 55-14-30
Grounds for judicial dissolution.
The superior court may dissolve a
corporation:
(2) In a proceeding by a
shareholder if it is established
that
(ii) liquidation is reasonably
necessary for the protection of
the rights or interests of the
complaining shareholder; ...
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Meiselman v. Meiselman
(NC 1982)
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Remedies …
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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In re Kemp & Beatley (NY 1984)
Chief Judge Cooke:
"A court has broad latitude in
fashioning alternative relief, but
when .... there has been a
complete deterioration of
relations between the parties, a
court should not hesitate to order
dissolution.
"Every order of dissolution,
however, must be conditioned
upon permitting any shareholder
of the corporation to elect to
purchase the complaining
shareholder's stock at fair
value. See NY BCL § 1118(a)."
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Francisco Goya
Tres de Mayo (1814)
Slide 22
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Brodie v. Jordan (Mass 2006)
“The defendants interfered with the
plaintiff’s reasonable expectations by
excluding her from decision-making,
denying her access to company
information, hindering her ability to sell
her shares. The defendants were the
only ones receiving any financial
benefit from the corporation.
“The remedy should neither grant the
minority a windfall nor excessively
penalize the majority. [Buyout ordered
by trial court] placed the plaintiff in a
significant better position than she
would have enjoyed absent the
wrongdoing. Money damages will be
the appropriate remedy.
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 23
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“Oppression” cases
1960-76
1984-85
1990-2000
No relief
27 (50.0%)
4 (10.8%)
55 (36.9%)
Dissolution order
16 (29.6%)
10 (27.0%)
42 (28.2%)
Buyout order
3 ( 5.6%)
20 (54.1%)
42 (28.2%)
Other relief
8 (14.8%)
3 ( 8.1%)
10 (6.7%)
TOTAL
54 (100%)
37 (100%)
149 (100%)
3.4
18.5
13.5
Cases/year
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 24
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Meaning of “fair value” …
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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MBCA § 14.34
Election to Purchase in Lieu of Dissolution
(a) In a proceeding under 14.30(2) to dissolve a [close
corporation] ... the corporation may elect or ... one or more
shareholders may elect to purchase all shares owned by the
petitioning shareholder at the fair value of the shares.
(b) An election to purchase ... may be filed with the court at any
time within 90 days after the filing of the petition under 14.30(2)
....
(d) If the parties are unable to reach an agreement [as to fair
value within 60 days after the election], the court ... shall
determine fair value ...
(e) ... the court shall enter an order directing the purchase ... as
the court deems appropriate, which may include payment of
the purchase price in installments ... and any additional costs,
fees, and expenses as may have been awarded ...
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 26
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Hypothetical
Remember Justin (40%), Kathy (40%) and Lorenzo (20%).
Kathy and Lorenzo kick Justin out. He petitions for
involuntary dissolution.
Kathy and Lorenzo then ask the court for a a buyout order.
After a failed negotiation, the court must fix “fair value”.
What is “fair value” of minority shares?
• Pro rata value of “going concern” enterprise value?
• Subject to discounts?
– “lack of control”
– “lack of marketability”
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 27
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Enterprise
value (100%)
Corporations:
A Contemporary Approach
$10.0
Chapter 30
Oppression in CHC
Slide 28
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Enterprise
value (100%)
$4.0
Corporations:
A Contemporary Approach
Pro rata
value (40%)
Chapter 30
Oppression in CHC
Slide 29
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Enterprise
value (100%)
Lack of
control
(30% discount)
Pro rata
value (40%)
$2.8
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 30
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Enterprise
value (100%)
Lack of
control
(30% discount)
Lack of
marketability
(30% discount)
Pro rata
value (40%)
$1.6
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
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Minority shares
• “Fair market value”
• “Fair value”
Enterprise
value
Corporations:
A Contemporary Approach
Control
discount
Marketability
discount
Chapter 30
Oppression in CHC
Pro rata
value
Slide 32
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1. In a CHC, a minority Shs can seek
involuntary dissolution:
a. When shareholders fail to elect
a new board
b. When directors disagree on
business policy
c. When control Shs are
oppressive
2. In a CHC, a minority Sh who has
a lousy buyout contract:
a. Can petition for dissolution if
terms are unfair
b. Is stuck with contract
3. In CHC, involuntary dissolution
will be granted …
a. When minority’s expectations
are frustrated
b. When course of dealing has
not been followed
c. Only if majority in bad faith
4. In a CHC, involuntary dissolution …
a. Has effect of terminating
business
b. Forces business assets to be
sold
c. Usually leads to buyout
5. In CHC, buyout orders …
a. Are not allowed by statute, only
dissolution available
b. Are allowed by statute, if minority
proves oppression
c. Are an elective “out” for control
group
6. In a CHC, “fair value” …
a. Is pro rata “enterprise value”
b. Is generally same as FMV
c. Is generally subject to minority
discounts
Answers:
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 33
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Minority protection
spreads to LLCs …
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 34
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Haley v. Talcott (Del Ch 2004)
Haley (50%) / Talcott (50%)
Judicial dissolution
Exit agreement
(corporate statute)
(LLC statute)
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 35
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Haley v. Talcott (Del Ch 2004)
It is inequitable to force Haley to
use the exit mechanism [in the
parties’ operating agreement].
Haley would be left liable for the
debt of any entity over which he
has no further control.
With no reasonable exit
mechanism [despite the
contractual “fair value” provision
in LLC operating agreement] I
find that Haley is entitled to
judicial dissolution [under the
Delaware two-shareholder
corporate dissolution statute].
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Vice Chancellor Leo Strine
Slide 36
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The end
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 37
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Bonavita v. Corbo (NJ Super 1996)
New Jersey Superior Court:
"... Alan Corbo will continue to make
decisions which are in his best
interests (and those of his family)
and ignore the wishes, needs and
the best interests of the
shareholders. “
"... Regardless of whether defendants’
action might otherwise be termed
“wrongful” or “illegal” there is no
question that defendants’ conduct
has destroyed any reasonable
expectations that plaintiff may have
enjoyed respecting her stock
interests. …. Defendants’ actions do
indeed constitute “oppression”.
Corporations:
A Contemporary Approach
Chapter 30
Oppression in CHC
Slide 38
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