Often majority shareholders will enter into various kinds of unfavorable contracts between the closely held company and themselves or a business owned by them in order to siphon off corporate earning or assets.
Generally, directors and majority shareholders are fiduciaries and owe to the minority shareholders along to the corporation itself certain duties of care, loyalty and good faith. Majority shareholders must place the interests of the corporation and its shareholders above their own.
Moreover, the majority shareholder or directors must act to further the best interest of the corporation and may not utilize their powers to further a personal interest.
Based upon those duties minority shareholder who are mistreated as a result of the majority entering into unfavorable contracts may have recourse. Unfavorable loans and leases are two types of contractual arrangements commonly used by the oppressor to drain off corporate earnings.
Courts have found the following to be forms of unlawful oppression and/or breach of fiduciary duty:
Minority shareholders who find themselves in a situation where the majority shareholder is taking funds from the business through loans or leases have recourse available including commencing litigation.
In the event that litigation is initiated, a court will fashion a remedy that it deems most appropriate, given the facts of the case. If oppression is found to exist, one of the most common remedies is to appoint a custodian or provisional director to run the corporation’s daily affairs until the shareholder disputes are resolved, ordering a sale of the corporation’s stock, or entering judgment to dissolve the corporation.
A judgment dissolving a corporation is a very drastic remedy and will only be ordered by the court if the court finds that the corporation has been irreparably harmed. Another common remedy that a court will utilize in resolving shareholder oppression claims is to order a buy out of the stock of one or more of the shareholders involved.
The usual scenario is for the court to order the majority shareholders to buy out the minority shareholder’s stock interest in the corporation. However, in special circumstances, courts have ordered the minority shareholder to buy out the majority shareholders’ stock interest.
In the instance of a buy out, a critical element of the court’s decision will be the value of the selling shareholder’s interest. In such cases, a shareholder agreement may establish the value or a court may determine the value of the interest.
Scott Unger is a Shareholder in Stark & Stark’s Litigation Group. For additional information please contact Mr. Unger at sunger@stark-stark.com. Stark & Stark, 993 Lenox Drive, Lawrenceville. 609-896-9060. Fax: 609-896-0629. www.stark-stark.com
