One of the most common claims amongst minority shareholders in a corporation is the “oppressed shareholder/member” claim. Essentially, one argues that their rights and expectations have been utterly defeated by the other shareholders and as such, they are entitled to some relief from the Court. Below, we take a look at the legal theories, cases and statutes that govern the oppressed shareholder causes of action.
Business Corporation Law Section 1104-A
Business Corporation Law S 1104-a(a)(1) permits the dissolution of a close corporation upon the petition of a minority shareholder owning 20% or more of the company’s outstanding shares when it is established that those in control have engaged in “oppressive actions” towards him/her.
A minority shareholder is oppressed when the “majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to [the shareholder’s] decision to join the venture.” See Matter of Kemp & Beatley [Gardstein], 64 N.Y.2d 63, 73, 484 N.Y.S.2d 799, 473 N.E.2d 1173).
Shareholders “may not act ‘for the aggrandizement or undue advantage of the fiduciar[ies] to the exclusion or detriment of the shareholders.’” SeeHarger, 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 ).
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.” See McCagg v. Schulte Roth &Zabel LLP, No. 601566/04, 20 Misc.3d 1139(A), 2008 WL 4065920, at *8 (N.Y.Sup.Ct., New York County 2008); see also In re Dissolution of Upstate Medical Assoc. P.C., 292 A.D.2d 732, 739 N.Y.S.2d 766, 767 (3rd Dept.2002).
“Although the term ‘oppressive actions’ is not statutorily defined, the Court of Appeals has held that ‘oppression should be deemed to arise 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.” In re Dissolution of Upstate Medical Assoc. P.C., 739 N.Y.S.2d at 767.
Courts have noted that oppression is analytically distinct from illegality and is subject to a “reasonable expectations” test. As the 2nd Department explained, “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.” See Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173 (1984). In undergoing this analysis, a court must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering into the particular enterprise. Id.
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 there are several common and recurring forms of oppression noted below.
Conspiracy to deprive a shareholder of his/her ownership of corporate stock, property, or assets is actually arguably the most oppressive of the common types of oppressive conduct because it would not only substantially defeat any reasonable expectation that the oppressed shareholder may have had, but would also totally extinguish any such expectations. See Achey v. Linn County Bank, 261 Kan 669, 931 P2d 16 (1997); also See In re Parveen, 259 A.D.2d 389, 391, 687 N.Y.S.2d 90 (1st Dep’t 1999); also see F. Hodge O’Neal, Oppression of Minority Shareholders: Protecting Minority Rights, 35 Clev. St. L. Rev. 121, 125-29 (1987).
A change of policy concerning the distribution of corporate income, designed to offer the minority shareholders no return on their investment in an attempted “squeeze-out”, may constitute oppressive conduct.See Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173 (1984).
“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.” Id.
Courts have found that efforts of majority shareholders to void a minority shareholder’s shares, falsify corporate documents, and prevent minority shareholder access to corporate records may constitute oppressive conduct. See Dissolution of Pickwick Realty Ltd., 246 A.D.2d 863, 668 N.Y.S.2d 84 (3d Dep’t 1998).
Courts have found it to be “oppressive conduct” to deny a shareholder his or her expectations of participating in the management and control of the corporation. See O’Donnel v. Marine Repair Services, Inc., 530 F Supp 1199 (SD NY 1982) (applying New York law); also see, Matter of Kemp &Beatley [Gardsteon], supra; Matter of Imperatore, supra; Matter of Gunzberg v. Art–Lloyd Metal Prods. Corp., 112 A.D.2d 423, 492 N.Y.S.2d 83.
When the majority shareholders of a close corporation award de facto dividends to all shareholders except a class of minority shareholders, such a policy may constitute “oppressive actions” and serve as a basis for an order made pursuant to section 1104–a of the Business Corporation Law dissolving the corporation.
Routine transfers of excess cash for instance can only be understood as de facto dividends since their sole impetus is the indirect ownership of the Company and their sole purpose is to meet the financial obligations and needs of the parent companies. See Official Committee of Unsecured Creditors of Buckhead America Corp. v. Reliance Capital Group (In re Buckhead America Corp.), 178 B.R. 956, 974 n. 26 (D. Del. 1994) (observing that, because payment to third party creditor of parent by subsidiary resulted from parent’s ownership of subsidiary, payment was “properly treated” as a dividend even though parent did not actually receive the funds).
Perhaps the most common form of siphoning is the payment of excessive executive compensation, which is often done in lieu of dividends to lower the corporation’s taxable income. See Raskin v. Walter Karl, Inc., 129 A.D.2d 642, 643, 514 N.Y.S.2d 120 (2d Dep’t 1987).
Determining whether one is an “oppressed shareholder” in a corporation is highly fact sensitive and requires the analysis and consultation of a seasoned, expert business attorney. If these fact patterns sounds familiar to you, contact us for a free initial phone consultation.
This article is intended for educational purposes only.