Oppression Close Corporations Outline

Oppression (Close Corporations)

1. Oppression in a Close Corporation

   1. JURIS SPLIT

      1. Massachusetts:

         • "'[S]tockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of an enterprise that partners owe to one another.'" Wilkes v. Springside Nursing Home, Inc. (quoting Donahue v. Rodd Electric Co.) - pg. 383

         • "[T]he standard of duty . . . is one of 'utmost faith and loyalty.'" Wilkes v. Springside Nursing Home, Inc. (quoting Donahue v. Rodd Electric Co.) - pg. 383

         • TEST: Whether the majority effectively frustrated the minority stockholder's purposes in entering the corporate venture and also denied him an equal return on his investment. See Wilkes v. Springside Nursing Home, Inc. - pg. 384-85

           • "[O]ur courts must weigh the legitimate business purpose, if any, against the practicality of a less harmful alternative." Wilkes v. Springside Nursing Home, Inc. - pg. 385

             • In Wilkes, the court found that the majority stockholders had breached their duty to Wilkes by terminating his salary and not reelecting him to the board or as an officer, without cause, thereby frustrating Wilkes' purposes in entering the venture. The court noted that in the context of a close corporation, "by terminating a minority stockholder's employment or by severing him from his position as an officer or director, the majority effectively frustrate the minority stockholder's purposes in entering on the corporate venture and also deny him an equal return on his investment." It was important in this case that since the corporation never declared dividends, the cutting off of Wilkes' salary assured that he would receive no return on his investment.

             • In Merold v. Exogen, the court found that no breach had occurred as Merold's purposes were not frustrated by the loss of his employment. This case is distinguishable from Wilkes in that (1) the corporation did not distribute all of the profits to shareholders in the form of salaries, (2) the value of the stock increased over time and Merold actually made a handsome profit, (3) Merold was not a founder of the corporation, and (4) there was less of a connection between stock ownership and Merold's job as there was no suggest that Merold had to purchase stock to keep his job.

      2. Delaware: In the absence of the election by a corporation to become a "close corporation" under DGCL § 343 or DGCL § 344, majority stockholders owe no fiduciary duties to minority stockholders. See Nixon v. Blackwell - pg. 389

         • BUT, presumably where a corporation does elect to be a close corporation and the affairs of the corporation are managed by the stockholders, those stockholders would owe the same fiduciary duties as those that directors customarily owe. See DGCL § 350, 351.

2. Statutory Oppression Remedy

   1. MBCA

      1. Dissolution

         • MBCA § 14.30(a)(2) provides that a court may dissolve a corporation "in a proceeding by a shareholder if it is established that:

           • (i) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock;

           • (ii) the directors or those in control of the corporation have acted, are acting, or will act in manner that is illegal, oppressive, or fraudulent;

           • (iii) the shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired; or

           • (iv) the corporate assets are being misapplied or wasted . . . ."

         • MBCA § 14.33(a) provides that "[i]f after a hearing the court determines that one or more grounds for judicial dissolution in section 14.30 exist, it may enter a decree dissolving the corporation and specifying the effective date of the dissolution . . . ."

      2. Appoint Custodian or Receiver

         • MBCA § 14.32(a) provides that "[a] court in a judicial proceeding brought to dissolve a corporation may appoint one or more receivers to wind up and liquidate, or one or more custodians to manage, the business and affairs of the corporation."

         • MBCA § 14.32(c) provides that "[t]he court shall describe the powers and duties of the receiver or custodian in its appointing order, which may be amended from time to time. Among other powers:

           • (1) the receiver

             • (i) may dispose of all or any part of the assets of the corporation wherever located, at a public or private sale, if authorized by the court; and

             • (ii) may sue and defend in his own name as receiver of the corporation in all courts of this state;

           • (2) the custodian may exercise all of the powers of the corporation, through or in the place of its board of directors or officers, to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors."

         • MBCA § 14.32(d) provides that "[t]he court during a receivership may redesignate the receiver a custodian, and during a custodianship may redesignate the custodian a receiver . . . ."

      3. Buy Out

         • MBCA § 14.34(a) provides that "[i]n a proceeding under section 14.30(2) to dissolve a corporation that has no shares listed on a national exchange or regularly traded in a market maintained by one or more members of a national or affiliated securities association, the corporation may elect or, if it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares."

         • Under MBCA § 14.34(b), the shareholder(s) who elect to purchase the shares must give notice to the court within 90 days of the petition for judicial dissolution and then negotiate with the petitioning shareholder.

         • MBCA § 14.34(c) provides that "[i]f, within 60 days of the filing of the first election, the parties reach agreements as to the fair value and terms of...

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