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Shareholder oppression and the new Louisiana Business Corporation Act.

I. INTRODUCTION
II. THE CLOSELY HELD CORPORATION AND THE DOCTRINE OF SHAREHOLDER
     OPPRESSION
     A. THE NATURE OF THE CLOSELY HELD CORPORATION
     B. THE CAUSE OF ACTION FOR OPPRESSION
     C. MEASURING OPPRESSION THROUGH "REASONABLE EXPECTATIONS"
III. THE OPPRESSION PROVISIONS OF THE NEW LBCA
     A. OVERVIEW OF THE STATUTORY PROCEDURE
     B. ANALYSIS OF SELECTED LIABILITY PROVISIONS
        1. THE DEFINITION OF OPPRESSION
        2. THE ROLE OF THE BUSINESS JUDGMENT RULE
        3. THE CORPORATION AS THE OPPRESSOR
        4. WAIVER OF THE RIGHT TO WITHDRAW
     C. ANALYSIS OF SELECTED REMEDY PROVISIONS
        1. REVERSING THE MBCA'S "DISSOLUTION UNLESS BUYOUT" SCHEME
        2. THE DOWNSIDE OF A BUYOUT
        3. THE MEANING OF "FAIR VALUE"
        4. THE EXCLUSIVITY OF THE BUYOUT REMEDY
        5. STAY OF DUPLICATIVE PROCEEDINGS
        6. TERMINATION OF SHAREHOLDER STATUS
 IV. CONCLUSION
APPENDIX
[section] 1-1435 OPPRESSED SHAREHOLDER'S RIGHT TO WITHDRAW
[section] 1-1436 JUDICIAL DETERMINATION OF FAIR VALUE AND
          PAYMENT TERMS FOR WITHDRAWING SHAREHOLDER'S SHARES
[section] 1-1437 STAY OF DUPLICATIVE PROCEEDINGS
[section] 1-1438 CONVERSION OF OPPRESSION PROCEEDING INTO
          COURT-SUPERVISED DISSOLUTION


I. INTRODUCTION

In Gruenberg u. Goldmine Plantation, Inc., (1) the Louisiana Court of Appeal noted that "[o]ur substantive law ... offers no remedy for the minority shareholder with substantial holdings who is out of control and trapped in a close 0 corporation." (2) Such an observation can be explained, at least in part, by the lack of a "shareholder oppression" doctrine in Louisiana--a doctrine designed to protect minority shareholders in closely held corporations from the improper exercise of majority control. (3)

Times, however, have changed. With the passage of the new Louisiana Business Corporation Act (LBCA), (4) Louisiana becomes the fortieth state in the country to provide statutory relief for oppressive conduct. (5) Effective January 1, 2015, (6) minority shareholders in Louisiana closely held corporations who are unjustifiably denied their participatory and financial rights can seek an escape from their "trapped" status by compelling the corporation to purchase their shares. (7)

This article examines the oppression provisions of the new LBCA. (8) The provisions reflect a great deal of thought and wisely incorporate many of the developments in oppression law over the past few decades. Moreover, the provisions unquestionably improve the rights of minority owners in Louisiana closely held corporations. While this article is not intended to provide an exhaustive treatment, it does seek to present a summary of the provisions and to call attention to some of the more noteworthy language. Part II discusses the nature of the closely held corporation and explains the national development of the doctrine of shareholder oppression. Part III provides an overview of the LBCA's oppression scheme and an analysis of selected liability and remedy provisions of the statute.

II. THE CLOSELY HELD CORPORATION AND THE DOCTRINE OF SHAREHOLDER OPPRESSION

A. The Nature of the Closely Held Corporation

In a publicly held corporation, a shareholder is typically a passive investor who neither contributes labor to the corporation nor takes part in management responsibilities. A shareholder in a publicly held corporation simply invests money and hopes to receive a return on that money through dividend payments and sale of the company's stock at an appreciated value. (9) By contrast, in a closely held corporation, a shareholder typically expects an active participatory role in the company, usually through employment and a meaningful role in management. (10) A shareholder in a closely held corporation also invests money in the venture, and like all shareholders, he hopes to receive a return on that money. By definition, however, a closely held corporation lacks an active market for its stock. (11) Thus, any investment return is normally provided by employment compensation and dividends, rather than by sales of stock at an appreciated value. (12)

Conventional corporate law norms of majority rule and centralized control can lead to serious problems for a minority investor in a closely held corporation. Traditionally, most corporate power is centralized in the hands of a board of directors. (13) The directors set policy, elect officers, and supervise the normal operation of the corporation. Because directors are elected by shareholder vote, the board of a closely held corporation is typically controlled by the shareholder (or shareholders) holding a majority of the voting power. Through this control of the board, a majority shareholder (or majority group) (14) has the ability to take unjustified actions that are harmful to a minority shareholder's interests. (15) Such actions are usually designed to restrict (or deny altogether) the minority's financial and participatory rights, and they are often referred to as "freezeout" or "squeezeout" actions that "oppress" a minority shareholder. (16) Common oppressive actions include the termination of a minority shareholder's employment, the removal of a minority shareholder from the board of directors, the denial of access to information, the refusal to declare dividends, and the siphoning off of corporate earnings to the majority shareholder. (17)

Quite often, these tactics are used in combination. For example, rather than declaring dividends, closely held corporations often distribute their earnings to shareholders in the form of salary and other employment-related compensation. (Reasonable employment compensation is tax deductible to a corporation as a business expense, while dividend payments are not.) (18) In a closely held corporation that does not pay dividends, therefore, a minority shareholder who is discharged from employment and removed from the board of directors is effectively denied any return on his investment as well as any input into the management of the business. (19) Such conduct often culminates with a majority proposal to purchase the shares of the minority owner at an unfairly low price. (20) In short, this denial of financial and participatory rights is at the core of many lawsuits alleging that the majority used his control in an abusive or "oppressive" fashion against a minority shareholder.

In a publicly held corporation, a minority shareholder can largely escape these abuses of power by selling his shares into the market and correspondingly recovering the value of his investment. This ability to liquidate provides some protection to investors in publicly held corporations from the conduct of those in control. (21) In a closely held corporation, however, the minority shareholder's investment is effectively trapped, as there is no ready market for the stock of a closely held corporation. (22) In fact, often the only potential purchaser of a minority's shares is the oppressive majority himself (or the corporation controlled by the oppressive majority). (23) As mentioned, these parties will usually offer an amount that is significantly below the fair value of the minority's shares--if they choose to make an offer at all. (24) Thus, a minority investor in a closely held corporation is in a vulnerable position, as he cannot escape oppressive majority conduct by selling into a well-developed market.

A market is, of course, only one way to cash out of a company. Even without a market for a company's shares, a minority shareholder could still recover the value of his investment if he could force the corporation (or the majority shareholder) to purchase his shares on demand. (25) No state's corporation law, however, provides such a right. Without an explicit buyout provision in a stockholders' agreement or a company's organizational documents, corporate shareholders have no right to compel a redemption of their holdings. (26)

Dissolution of a company can also provide liquidity to business owners by requiring the sale of the company and by allocating to each owner his proportionate share of the company's sale value (after the claims of creditors have been satisfied). (27) If a minority shareholder in a closely held corporation had the right to compel dissolution, a mechanism for recovering the value of the invested capital would exist. In the closely held corporation setting, however, a minority shareholder has no default right to dissolve a corporation by "express will"--i.e., voluntary dissolution usually requires the assent of at least a majority of the outstanding voting stock of a corporation. (28) For an oppressed minority shareholder, therefore, voluntary dissolution rights are largely unhelpful.

In short, when a majority shareholder in a closely held corporation exercises his control in an oppressive fashion against a minority shareholder, the minority has little ability to exit the situation.

B. THE CAUSE OF ACTION FOR OPPRESSION

Over the years, state legislatures and courts have developed two significant avenues of relief for the "oppressed" close corporation shareholder. First, many state legislatures have amended their corporate dissolution statutes to include "oppressive conduct" by "directors or those in control" as a ground for involuntary dissolution of the corporation. (29) Moreover, when oppressive conduct has occurred, actual dissolution is not the only remedy at the court's disposal. Both state statutes and judicial precedents have authorized alternative remedies that are less drastic than dissolution (e.g., buyouts, provisional directors). (30) As the alternative forms of relief have broadened over the years, orders of actual dissolution have become less frequent. (31) Thus, "oppression" has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief. (32)

Second, particularly in states without oppression-triggered dissolution statutes, some courts have imposed a fiduciary duty between shareholders of a closely held corporation and have allowed an oppressed shareholder to bring a direct cause of action for breach of this duty. In the seminal decision of Donahue v. Rodd Electrotype Co. of New England, Inc., (33) the Massachusetts Supreme Judicial Court adopted such a standard:

      [W]e hold that stockholders in the close corporation owe one
   another substantially the same fiduciary duty in the operation of
   the enterprise that partners owe to one another. In our previous
   decisions, we have defined the standard of duty owed by partners to
   one another as the "utmost good faith and loyalty." Stockholders in
   close corporations must discharge their management and stockholder
   responsibilities in conformity with this strict good faith
   standard. They may not act out of avarice, expediency or
   self-interest in derogation of their duty of loyalty to the other
   stockholders and to the corporation. (34)


Following the lead of the Donahue court, several courts outside of Massachusetts have also imposed a fiduciary duty between shareholders in closely held corporations. (35)

The development of the statutory cause of action and the shareholder fiduciary duty reflect "the same underlying concerns for the position of minority shareholders, particularly in close corporations after harmony no longer reigns." (36) Because of the similarities between the two remedial schemes, it has been suggested that "it makes sense to think of them as two manifestations of a minority shareholder's cause of action for oppression." (37) In the closely held corporation setting, therefore, it is sensible to view the parallel development of the statutory cause of action and the shareholder fiduciary duty as two sides of the same coin--i.e., the shareholder's cause of action for oppression.

C. MEASURING OPPRESSION THROUGH "REASONABLE EXPECTATIONS"

The development of a shareholder's cause of action for oppression requires courts to determine when "oppressive" conduct has occurred. In wrestling with this issue, courts have developed three principal approaches to defining oppression. (38) First, some courts define oppression as:

   [B]urdensome, harsh and wrongful conduct, a lack of probity
   and fair dealing in the affairs of a company to the prejudice of
   some of its members, or a visible departure from the
   standards of fair dealing, and a violation of fair play on which
   every shareholder who entrusts his money to a company is
   entitled to rely. (39)


Second, some courts define oppression by linking it to action that constitutes a breach of fiduciary duty. (40) Third, many courts tie oppression to majority conduct that frustrates a minority shareholder's "reasonable expectations." (41) Of these three approaches, (42) the reasonable expectations standard garners the most approval. The highest courts in several states have adopted the reasonable expectations approach, (43) and commentators have generally been in favor of the reasonable expectations standard. (44)

The New York decision of In re Kemp & Beatley, Inc. (45) has been particularly influential in giving some context to the reasonable expectations standard. In Kemp, the court of appeals stated that "oppressive actions ... refer to conduct that substantially defeats the 'reasonable expectations' held by minority shareholders in committing their capital to the particular enterprise." (46) As the court continued:

A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner's expectations in entering the particular enterprise. Majority conduct should not be deemed oppressive simply because the petitioner's subjective hopes and desires in joining the venture are not fulfilled. Disappointment alone should not necessarily be equated with oppression.

Rather, oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture....

... A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment. (47)

As the Kemp court illustrates, the reasonable expectations standard focuses primarily on the effect that majority conduct has on the minority shareholder's interests. (48) When majority conduct unjustifiably (49) harms the minority's reasonable expectations, oppression liability is typically found.

III. THE OPPRESSION PROVISIONS OF THE NEW LBCA

A. OVERVIEW OF THE STATUTORY PROCEDURE

The LBCA is based on the American Bar Association's Model Business Corporation Act (MBCA). (50) Under MBCA [section] 14.30, a shareholder can petition for judicial dissolution on various grounds, including when "the directors or those in control of the corporation have acted, are acting, or will act in a manner that is ... oppressive...." (51) LBCA [section] 1-1430 (which is based on MBCA [section] 14.30) also states that a shareholder can petition for dissolution on various grounds, but the oppression basis is omitted. Instead, [section][section] 1-1435 to 1-1438 provide an alternative procedure that allows an oppressed shareholder in a closely held corporation (52) to withdraw from the corporation and to compel the company to purchase his shares at fair value. No other remedy for oppressive conduct is permissible. These oppression sections are somewhat unique, as they have no direct analog under the MBCA.

The "oppressed shareholder's right to withdraw" is commenced by "giving written notice to the corporation that the shareholder is withdrawing from the corporation on the grounds of oppression." (53) Such a notice operates as a sixty-day irrevocable offer by the shareholder "to sell to the corporation at fair value the entirety of the shareholder's shares in the corporation." (54) The notice can specify the price that the withdrawing shareholder proposes as the fair value of the shares, but such a specification is not required. (55)

A corporation receiving a shareholder's written notice of withdrawal may choose to accept or reject the shareholder's offer to sell. (56) A corporation may accept by giving written notice of its acceptance within the sixty-day irrevocability period. (57) If the shareholder's notice of withdrawal specified a price for the shares, the corporation's acceptance operates as an acceptance of both the offer to sell and the proposed price--unless the notice of acceptance states that it is only accepting the offer to sell. (58) If such a limited acceptance is stated, "the notice of acceptance operates only as an acceptance of the shareholder's offer to sell the shares at their fair value." (59)

A notice of acceptance that operates as an acceptance of both the offer and the price forms "a contract of sale of the shares at that price." (60) The shareholder and the corporation are both given the right to file an action to enforce the contract if it is not fully performed within thirty days of the effective date of the notice of acceptance. (61)

A limited notice of acceptance that operates only as an acceptance of the shareholder's offer to sell at fair value results in a sixty-day period of negotiation between the shareholder and the corporation over the fair value of the shares and the terms under which the corporation will effectuate the purchase. (62) Within one year of the expiration of the sixty-day period, either party may file an action to have a court determine the fair value of the shares and the terms for their purchase. (63)

If the corporation does not accept the shareholder's offer to sell, the shareholder may file an action against the corporation in an attempt to establish oppression and to enforce a corresponding right to withdraw. (64) If the shareholder is successful in obtaining a judgment on the grounds of oppressive conduct:

   [T]he court shall stay the proceeding for a period of at least
   sixty days from the date that the judgment is rendered to
   allow the corporation and shareholder to negotiate the fair
   value and purchase terms for the withdrawing shareholder's
   shares, or other terms for the settlement of their dispute. (65)


After the expiration of the stay, either party may file an action to have a court determine the fair value of the shares and the terms for their purchase. (66)

B. ANALYSIS OF SELECTED LIABILITY PROVISIONS

1. THE DEFINITION OF OPPRESSION

Although the MBCA does not provide any definition of "oppressive" conduct, the LBCA does. Interestingly, however, LBCA [section] 1-1435(B) does not define oppression as conduct that frustrates a minority shareholder's reasonable expectations. (67) Instead, oppression is defined as when a corporation's practices, "considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder." (68) Thus, the LBCA comes closer to adopting the "fair dealing and fair play" definition of oppression that some courts have referenced. (69)

Although fairness to the shareholder is the touchstone for measuring oppression under the LBCA, the statute provides further guidance to courts in assessing fairness. First, although frustration of the minority's reasonable expectations is not the literal definition of oppression under [section] 1-1435(B), the "reasonable expectations of all shareholders in the corporation" is relevant "in assessing the fairness and good faith of the corporation's practices." (70) In other words, a minority shareholder's reasonable expectations are relevant in evaluating the corporation's obligation to deal fairly with the shareholder. (71) By emphasizing the reasonable expectations of "all" shareholders, however, the statute signals that the minority's expectations are not the sole subject of the court's inquiry; instead, the minority's expectations must be considered along with the expectations of the majority and other minority owners. (72)

Courts outside of Louisiana have expressed this point by noting that reasonable expectations can be viewed as mutual understandings between the shareholders over how their business will be run. (73) To be "reasonable," such expectations "must be known to or assumed by the other shareholders and concurred in by them." (74) Thus, the oppression doctrine is not about vindicating a plaintiff's subjective hope or desire that never becomes part of a collective understanding between the shareholders. (75) Rather, the doctrine seeks to protect rights and expectations that all of the owners understood were part and parcel of being a shareholder in the business. Under the LBCA, therefore, oppression can be viewed as a failure "to deal fairly and in good faith with [a] shareholder" because it deprives the shareholder of a right or benefit that was understood by all of the owners to be part of what they received as a shareholder in the business. (76)

Second, "the conduct of the shareholder alleging oppression" is relevant in assessing the fairness of the corporation's actions to the shareholder. (77) This reference is designed to make clear that shareholders of a closely held corporation, simply due to their status as shareholders, do not have permanent rights to participatory roles in the company regardless of their behavior. For example, it is typically not oppressive to terminate the employment of a shareholder, or to remove a shareholder from a director position, when that shareholder has engaged in substantial misconduct that harms the company. (78) Some shareholder rights, however, are possessed simply as a matter of status (e.g., the right to receive a proportionate share of any distributed profits, or the right to inspect company books and records), and even a shareholder engaging in substantial misconduct cannot be properly denied these rights. (79) Thus, Louisiana courts should take care to avoid overstating the effect of the statutory consideration given to the conduct of the plaintiff shareholder.

Third, it is noteworthy that the LBCA does not follow the Kemp court's definition of reasonable expectations as those that are "held by minority shareholders in committing their capital to the particular enterprise" and that are "central to [a shareholder's] decision to join the venture." (80) Such a focus on the shareholder's expectations at the time he decided to invest in (and therefore join) the venture has been criticized as unduly narrow. (81) Indeed, a strict time of investment standard seems to ignore the possibility that post-investment expectations may arise. One can imagine situations where a shareholder's expectations have changed since the time of the initial investment due to developments in the company, a changing business climate, or the mere passage of years. Focusing on one point in time--the time of investment--to measure the shareholder's expectations fails to capture potentially valid and reasonable expectations that may develop well after a shareholder commits capital to the venture.

The Kemp definition also disadvantages persons who receive stock via gift or inheritance (transferee shareholders). Such persons become shareholders in a closely held corporation through the investment decisions of others (the transferors). Correspondingly, they gain the status of shareholder without having to contribute any capital to the venture. Under the literal Kemp formulation, therefore, it could be argued that shareholders who receive their stock via gift or inheritance have no reasonable expectations at all. (82)

By avoiding the "temporal" Kemp language and focusing on the "reasonable expectations of all shareholders in the corporation," the LBCA more appropriately recognizes that reasonable expectations may develop at any time and may be possessed by any shareholder, regardless of whether that particular shareholder committed capital to the venture. (83) Indeed, the statutory comment explicitly rejects the temporal aspect of Kemp and recognizes that second-generation shareholders may be protected under the statute. (84)

Finally, [section] 1-1435(B) indicates that "[c]onduct that is consistent with the good faith performance of an agreement among all shareholders is presumed not to be oppressive." (85) Such a statement defuses any concern that the oppression doctrine and its consideration of reasonable expectations may trump any existing contractual arrangements between the shareholders. Agreements, in other words, are presumed to express the reasonable expectations of the parties, and are similarly presumed to express what the owners themselves have defined as "fair" conduct in the circumstances covered by the agreement. (86) Although the statute references agreements "among all shareholders," (87) agreements between the corporation and the withdrawing shareholder (e.g., an employment contract) should presumably be treated similarly. After all, such a contract is assented to by the withdrawing shareholder and should be construed as defining what is fair conduct to him in the circumstances covered by the agreement.

This is not to say, however, that the "good faith performance of an agreement" language will make every oppression dispute involving a contract easy to resolve. Particularly difficult issues arise when the controlling shareholder has the unilateral power to "trigger" an agreement, such as an agreement that compels a minority shareholder to sell his stock to the company upon an involuntary termination. The protections of the oppression doctrine (or, at a minimum, the implied covenant of good faith and fair dealing in contract) would seem to restrain the controlling shareholder from purposefully triggering the agreement for self-aggrandizing or opportunistic purposes. (88) The presence of broad discretionary language in the agreement, however, often complicates the issue. (89)

2. THE ROLE OF THE BUSINESS JUDGMENT RULE

Many shareholder oppression disputes involve confusion over whether the business judgment rule applies and, if so, how the application of the rule affects a court's oppression analysis. The business judgment rule is an especially deferential standard of review that insulates directors and officers from liability for a poor decision so long as the decision can be attributed to a rational business purpose. (90) For the business judgment rule to be invoked, three prerequisites must be met. The decision must be made (1) in good faith, (2) on an informed basis, and (3) with no conflicts of interest. (91)

From a liability standpoint, the scrutiny given to the merits of a decision under the business judgment rule is practically nonexistent, as only a de minimis rationality standard is involved. (92) Thus, if the prerequisites of the rule are met and the rule is applied, majority decisions involving employment, management, or dividend matters--internal decisions that form the core of many shareholder oppression disputes--are largely insulated from judicial oversight. (93) Significantly, the notion of balancing the corporation's interests and an individual shareholder's interests is not part of a traditional business judgment rule analysis, as such an analysis does not concern itself with a shareholder's interests at all. If a decision can be attributed to a rational business purpose, the decision is upheld, regardless of how the decision affects a particular shareholder.

Does the business judgment rule apply to shareholder oppression disputes? Some courts have explicitly acknowledged that certain decisions in closely held corporations call for more judicial scrutiny than conventional business judgment rule deference. (94) Even if a court does not explicitly repudiate the deference of the business judgment rule, the application of the oppression doctrine implicitly conveys such a repudiation. After all, the oppression doctrine is premised on the notion that decisions about seemingly routine matters (e.g., employment, management, dividends) can be part of a minority shareholder freezeout. (95) As a result, the doctrine recognizes that such decisions require more than a mere surface inquiry into the majority's conduct. Indeed, the fact that courts applying the oppression doctrine are subjecting the majority's actions to "reasonable expectations" inquiries or "fair dealing and fair play" analyses suggests that courts are doing more than simply asking whether a majority decision can be attributed to a rational business purpose. (96)

LBCA [section] 1-1435 does not clearly indicate whether the business judgment rule applies to a shareholder's attempt to establish oppression. Nevertheless, the structure of the statute suggests that the deference of the business judgment rule is inappropriate. Section 1-1435(B) indicates that a corporation is obligated "to deal fairly in good faith with the shareholder." (97) Fairness, by itself, has nothing to do with the business judgment rule. When the rule applies, a court does not inquire into the fairness of a decision at all. Moreover, as the statute indicates, fairness to an individual shareholder's interests is front and center in an oppression analysis, as opposed to the exclusive focus on the company's interests embodied in the business judgment rule. Finally, [section] 1-1435(B)(2) requires the court to consider the reasonable expectations of "all shareholders," which is a different and deeper inquiry than simply asking the court to determine whether there is a rational business purpose for the majority's decisions. (98)

Some judicial decisions note that a "shareholder's reasonable expectations must be balanced against the corporation's need to exercise its business judgment and run its business efficiently." (99) Similarly, the comment to [section] 1-1435 of the LBCA states that "[t]he majority shareholders are entitled to control the business through the exercise of their voting power, and they are entitled as much as the minority shareholders to have their reasonable expectations respected." (100) Statements such as these should not be understood to mean that the business judgment rule applies to oppression disputes. Once again, a traditional business judgment rule application focuses exclusively on the corporation's interests and does not "balance" anything against those interests. (101) References to "balance" and respecting majority and minority expectations, therefore, are not references to the business judgment rule. Instead, they simply convey what [section] 1-1435(B)(2) makes clear--i.e., an oppression analysis is not based solely on an inquiry into the plaintiffs expectations. A court must attempt to measure the obligation to deal fairly and in good faith with the plaintiff by considering the reasonable expectations of all of the shareholders, including the majority's right to control the business. A requirement to consider the expectations of both the minority and the majority (not the business judgment rule), however, is very different from a requirement to defer to the majority's will upon a showing of a rational business purpose (the business judgment rule).

3. THE CORPORATION AS THE OPPRESSOR

MBCA [section] 14.30 indicates that a shareholder may seek judicial dissolution on the ground that "the directors or those in control of the corporation" have acted in an oppressive manner. (102) LBCA [section] 1-1435(A), by contrast, states that a shareholder may withdraw from a corporation and seek a buyout if the "corporation" engages in oppression of the shareholder. According to the statutory comment, the shift in focus from "directors or those in control" to a "corporation" seems to be motivated by a desire to make it easier for a plaintiff to establish an oppression claim without having to focus on the conduct of a particular individual or group. As the comment states: "Although a corporation's oppression of a shareholder is unlikely to occur without the complicity of its directors or controlling shareholders, this Section does not require the complaining shareholder to prove that any particular participant in corporate management is responsible for the oppression that occurs." (103)

Despite this apparent explanation, the notion of a corporation engaging in oppression is puzzling. While oppression can occur through corporate acts (e.g., a termination of employment by the corporation, or a payment of excessive compensation by the corporation), there are other common examples of oppressive conduct that are difficult to view as corporate acts. For example, when a majority shareholder votes to remove another shareholder as a director of the company, (104) it is hard to describe such conduct as a corporate act. After all, the shareholder is acting in an individual capacity when casting his vote and not as a corporate agent. Similarly, a director or controlling shareholder who simply embezzles money from the corporation is presumably committing an oppressive act, (105) but it is difficult to describe such conduct as the "corporation" engaging in oppression. In short, while the comment suggests that the language of [section] 1-1435(A) was not meant to narrow the range of conduct that would typically be characterized as oppressive, the emphasis on the "corporation" engaging in oppression may create unintended confusion among courts and litigants.

4. WAIVER OF THE RIGHT TO WITHDRAW

LBCA [section] 1-1435(J) allows the shareholders of a corporation to "waive the right to withdraw under this Section by unanimous written consent ... stating that the shareholders are waiving the right provided by law to withdraw from the corporation on grounds of oppression." (106) Whether such a waiver should be

allowed is debatable.

On the one hand, oppression litigation (like all litigation) is expensive, and the buyout remedy can cause financial difficulties for the corporation. (107) If the shareholders have other mechanisms for addressing dissension (e.g., a buy-sell agreement), waiving the withdrawal right to avoid the risk of oppression litigation may be sensible. (108)

On the other hand, both courts and commentators have noted that, because owners of closely held corporations are frequently linked by family or other personal relationships, there is often an initial atmosphere of mutual trust that diminishes the sense that contractual protection is needed. (109) Commentators have also argued that owners of closely held corporations are often unsophisticated about legal matters such that the need for contractual protection is rarely recognized. (110) These "over-trust" and unsophistication arguments would seem to apply with equal force to a minority shareholder's inability to recognize that legal protection, such as the oppression doctrine, may be needed down the road. A waiver of the right to withdraw, therefore, may simply reflect a minority shareholder's overtrust, unsophistication, and desire not to "rock the boat," (111) rather than an informed weighing of the pros and cons of relinquishing a legal right. Perhaps for these reasons, some courts in jurisdictions with oppression statutes have held that waivers of rights under such statutes are against public policy and unenforceable. (112)
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Title Annotation:I. Introduction through III. The Oppression Provisions of the New LCBA B. Analysis of Selected Liability Provisions, p. 461-491
Author:Moll, Douglas K.
Publication:Loyola Law Review
Date:Sep 22, 2014
Words:5410
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