A US Supreme Court Justice once famously stated that, while he might not be able to intelligently define what qualifies as obscene or pornographic, “I know it when I see it.”1 Many advisors and owners say the same thing about “shareholder oppression.” They might not know the exact definition of “shareholder oppression,” but they claim to “know it when they see it.” But do they?
Oppressive conduct is defined as “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder.” MCL 450.1489(3).2 That’s a mouthful, for sure, but it leads to a key question: “What are a ‘shareholder’s interests as a shareholder?’” To determine if there has been any interference with a shareholder’s interests, you first must understand what those interests are.
Shareholder rights include:
- Examining Corporate Books and Records: This right to review the company’s records is even the subject of specific statutory law, which sets out the process for requesting records and penalties if the company does not comply. If those in control of the company refuse to allow another owner to review the company’s records, chances are it qualifies as oppression.
- Voting at Shareholder Meetings: Although one particular owner may be in the minority and their vote may not carry the day, they still have the right to participate and vote on certain matters.
- Electing Directors: Directors may determine the overall company strategy and who is in charge, but they serve at the pleasure of the shareholders. If a shareholder’s right to elect directors is impacted, a claim for oppression may exist.
- Adopting Bylaws: The bylaws set out the rules that will govern the company and its owners. The owners have a right to determine those rules and, with sufficient votes, amend the bylaws.
- Compliance With Governing Documents: Some courts also recognize that a shareholder’s interest includes compliance with bylaw, operating-agreement, or other governing-document provisions. If those in control violate those provisions in a way that negatively impacts another shareholder, that shareholder may have a claim for oppression.
- Employment: In many closely held corporations, an owner’s employment with the company is often linked to distributions or other benefits received by the owners. In such a situation, the termination of an owner’s employment may amount to oppression.
- Receiving Dividends: While last on this list, receiving your fair share of any dividends is perhaps the most well-known, fundamental shareholder right. A claim for oppression may exist if those in control are taking action that negatively impacts a shareholder’s dividends.
While oppression can exist when even just one of the above shareholder interests is impacted, in many situations, a shareholder experiences a combination of some, or even all, of the above. What starts as a denial of a shareholder’s right to review records may progress to a refusal to notify a shareholder of meetings and votes, withholding of dividends, and termination of employment, resulting in a truly toxic situation. But with a good understanding of shareholder rights you will “know it when you see it,” such that these situations can be addressed immediately, all owners can be reminded of their rights, and lawsuits for shareholder oppression can hopefully be avoided.
1This famous phrase is attributed to Justice Potter Stewart.
2While this article discusses corporations and claims for shareholder oppression, the same general principles apply to LLCs and claims for member oppression.More Blog Posts