(June 25, 2015) A recent decision by the Michigan Supreme Court raises two important points for Michigan businesses and business owners: issues of shareholder oppression and any potential remedies for oppression are decided by the judge, not a jury, and a violation of a shareholder agreement or other governing corporate documents can create a claim for shareholder oppression.

In Madugula v Taub,1 Rama Madugula, a minority owner of Dataspace, Inc., brought suit against the corporation’s founder and majority shareholder, Benjamin Taub. Madugula alleged that Taub’s unilateral decision to terminate Madugula’s employment and switch the focus of Dataspace to marketing a new product required a 70% shareholder vote under a shareholder agreement. Madugula claimed that the failure to put the issues to a vote was evidence of shareholder oppression under Michigan’s Business Corporation Act (“BCA”). Prior to trial, Taub moved to prevent the case from being heard by a jury, claiming that neither the BCA nor the Michigan Constitution provided a right to a jury trial for shareholder oppression claims. The trial court, however, permitted the claims to go to a jury.

The Supreme Court reversed and found in favor of Taub, holding that shareholder oppression actions were equitable claims to be heard by the Court, rather than legal claims entitling the plaintiff to a jury trial. The Court reasoned that the remedies provided in the shareholder oppression statute were overwhelmingly equitable in nature, and also noted that oppression claims were similar to shareholder derivative actions and actions for corporate dissolution, both of which were traditionally equitable. Because the claims were equitable in nature and required the trial courts to “devise specific remedies” and “give relief in successive stages [. . .] adjusted to varying conditions,” the Michigan Supreme Court stated that the remedies should be carefully crafted by the trial courts rather than juries.

The Court also addressed whether a breach of a shareholder agreement can be used to establish shareholder oppression. Because claims of shareholder oppression can be based on conduct that interferes with a shareholder’s rights, and the shareholder agreements at issue specified a shareholder right requiring a 70% super-majority for certain actions, the Court held that evidence of a breach of a right or interest contained in a shareholder agreement can be evidence of shareholder oppression.

The Michigan Supreme Court’s ruling in Madugula is important for Michigan businesses and business owners on two fronts. For one, it makes clear that issues of oppression and the potential remedies for oppression are decisions for the judge, not a jury. As Michigan has now moved to specialized business courts, it will be the judges assigned to these specialized courts making the decisions regarding oppression and what remedies to provide, not the jury, and understanding this reality at the outset of any case will be important in determining how to proceed. Secondly, the Madugula ruling reinforces the vital role of articles of incorporation, corporate bylaws, shareholder agreements, and other governing corporate documents. These agreements are at the heart of how a business and its owners relate to one another, and evidence that they are not being followed may support claims for shareholder oppression. The Madugula decision highlights that, for shareholder oppression claims, business owners need to understand both who will be deciding the issues and what the corporate documents say.

 

1 496 Mich 685; 853 NW2d 75 (2014).

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