Shareholder Oppression: A Frustrated Mess?

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Yikes! That was a bad one.  But there’s your James Marshall Hendrix reference for the day.

Shareholder oppression is another easy-to-say, hard-to-apply legal standard that can trigger the break-up of a closely held corporation.  Broadly, it applies where a dominant shareholder squeezes out or excludes a minority shareholder from having a say in the corporation’s business.

Iversen v. C.J.C. Auto Parts and Tires, Inc., 2014 IL App (2d) 130706-U gives some content to shareholder oppression as a remedy for an aggrieved stockholder.

The plaintiff, a 20% shareholder in a Chicago auto parts company, sued the other shareholders and the company after the defendants refused to buy the plaintiff’s shares or accept plaintiff’s offer to sell his shares to an outside buyer.

The plaintiff claimed the defendants ganged up on him to dilute his shares and prevent his retirement. The plaintiff sued the corporation and individual shareholders for oppression under the Illinois corporation statute, and brought civil conspiracy and breach of fiduciary claims.  The trial court dismissed all of the plaintiff’s claims.

Result: Dismissal affirmed.

Reasons:

The plaintiff failed to allege oppressive conduct under the law.  Section 12.56(a)(3) of the Business Corporation Act – 805 ILCS 5/12.56(a)(3) (the “BCA”)- gives a minority shareholder in a close corporation a remedy against directors that act oppressively, illegally or fraudulently with respect to the other shareholders.

 The BCA doesn’t define oppression.  

Courts interpret oppression to mean “arbitrary, overbearing and heavy-handed” conduct.  Examples of shareholder oppression include a corporate officer using a corporation for his own benefit to the exclusion of other stockholders, failing to follow corporate formalities, flouting by-laws freezing out minority stockholders.  (¶¶ 27-30).

The plaintiff here failed to allege defendants’ self-dealing, violation of corporate by-laws, mismanagement or waste of corporate assets. The defendants refusal to accede to plaintiff’s buy-out request didn’t equal  oppression since the shareholder agreement didn’t require a buy-out or the approval of plaintiff’s share sales attempts.  (¶¶ 34, 39).

The plaintiff’s conspiracy claim also failed.  Civil conspiracy requires both (a) an independent tort – underlying wrongful conduct, and (b) an agreement between the defendants to carry out the wrongful conduct.  Without a predicate tort, there can be no conspiracy. 

The plaintiff’s conspiracy claim against the corporate defendant failed because a corporation can only act through its agents.  And by definition, a corporation can’t conspire with itself. (¶¶ 40-41).

Comments:

This case illustrates the importance of choosing the right remedy.  In hindsight, I would have added a specific performance claim to require the defendants to adhere to the agreement’s buyout and share appraisal provisions.

The case’s practice tip value lies in its punctuating how important it is to thoroughly vet a shareholder agreement before investing.  With no specific terms in the shareholder contract obligating defendants to buy back plaintiff’s shares or to not squelch plaintiff’s sale attempts, the plaintiff was basically at the defendants’ mercy.

On the pleading front, it’s clear that a colorable oppression claim under the BCA requires allegations of a corporate officer’s self-dealing, exclusionary conduct, corporate mismanagement or a failure to follow by-laws.  Also, a valid conspiracy claim must be factually detailed to survive summary judgment.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.