Introduction
Majority Shareholders with closely held businesses need to be careful that their actions do not violate their partnership agreements, which may in turn violate Michigan law.
If such a violation is found, a Court has broad discretion to provide relief to a harmed minority shareholder.
Unlawful Conduct of Majority Shareholders
In a closely held company it is very easy for a majority of owner[s] to freeze out a minority owner from:
- Control – Decision-making
- Disclosures of Company Business, finances, agreements.
- Sharing in Profits in the Company
- Employment in the Company.
Michigan enacted its Minority Shareholder Oppression Statute to provide a minority shareholder with relief from such injustice. A Court uses its broad equitable powers to “right the wrongs” committed by shareholders in control of the Company.
The Statute: Minority Shareholder Oppression, MCL 450.1489
“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;- fraudulent; or
- willfully unfair and oppressive to the corporation or to the shareholder.”
Most often, a minority shareholder bringing a lawsuit for minority shareholder oppression alleges “willfully unfair and oppressive” actions by those in control of the company.
“Willfully unfair and oppressive conduct” has been 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.”
What Can a Court do for an Aggrieved Minority Shareholder?
If misconduct is proven, A Court has broad discretion to do justice.
It may make an order or grant relief as it considers appropriate, including, without limitation, an order providing for any of the following:
- dissolution…of the corporation.
- The cancellation or alteration of the…bylaws of the corporation.
- The cancellation, alteration, or injunction against a resolution or other act of the corporation.
- The direction or prohibition of an act of the corporation or of shareholders.
- The purchase at fair value of the shares of a shareholder…”
This Statute applies to closely held corporations, there is also a virtually similar Michigan statute that applies to LLCs.
The Recent Michigan Supreme Court Decision of Madugula v Taub
Because of how new these shareholder oppression statutes are, courts applying the statute have wrestled with a few legal issues. The July 15, 2014 Supreme Court Decision provided some much needed precedence in this regard.
On July 15, 2014 the Michigan Supreme Court came out with its decision in Madugula v Taub that answered some questions that Michigan business lawyers had been asking ever since the Minority Shareholder Oppression Statutes had been adopted in Michigan.
Facts of Madugula v Taub:
- Defendant, Taub founded Dataspace, Incorporated, in 1994.
- In 2002, Taub hired plaintiff, Madugula, as vice president of sales and business development
- Taub was Dataspace’s sole shareholder until 2004, when Madugula became part owner, with Madugula purchasing 29% of the outstanding shares
- Pursuant to a stock shareholder agreement, Taub became president, secretary, and treasurer of Dataspace, while Madugula was vice presidents
- After becoming a shareholder, Madugula continued to work for Dataspace, drawing a salary of about $150,000 a year.
- In August 2007, Taub terminated Madugula’s employment with Dataspace. Because of his termination, Madugula no longer received a salary from Dataspace, but he maintained his board position and his interest in the company. As a shareholder, he continued to receive dividends from the company.
Madugula sued for minority oppression and demanded a jury trial.
Some of the issues that have been left unanswered until the Supreme Court’s decision:
- Is a shareholder suing under an oppression claim entitled to a jury trial?
The Court’s Answer: No. The Court is given broad equitable power to fashion a remedy for the aggrieved minority shareholder. Equity is for the Court to give, not a jury.
- If a majority shareholder breaches the bylaws, can that be evidence of “oppression”, or is it simply a “breach of contract” claim?
The Court’s Answer: a breach of the bylaws CAN be evidence of oppressive actions. For instance, in Madugula, a shareholder’s termination of employment required a 70% super majority vote, and Taub did not have a super majority vote to terminate Madugula, but did it anyway. This is evidence of oppressive conduct that could result in Taub being liable.
- Can oppressive conduct be shown if a shareholder is terminated, but still has a seat on the board directors?
The Court did not directly answer this question, but the obvious answer appears to be : YES
Lesson:
Majority Shareholders with closely held businesses need to be careful that their actions do not violate their partners’ rights, especially in light of Madugula v Taub. The Michigan Supreme Court is setting firm precedent on this relatively new statute. If such a violation is found, a Court has broad discretion to provide relief to a harmed minority shareholder.
Sincerely,
Jeshua T. Lauka, Attorneys at Law 99 Monroe Ave. NW Ste. 1210 Grand Rapids, MI 49503 Tel: (616) 454-3883 Fax: (616) 454-3988 Email: Jeshua@dwlawpc.com Website: www.dwlawpc.comhttp://www.dwlawpc.com/ Blog: http://jeshualaukalegalnews.wordpress.com/ Follow me on Twitter: http://twitter.com/JeshuaTLauka
This electronic mail message contains information that (a) is or may be LEGALLY PRIVILEGED, CONFIDENTIAL, PROPRIETARY IN NATURE, OR OTHERWISE PROTECTED BY LAW FROM DISCLOSURE, and (b) is intended only for the use of the Addressee(s) named herein. If you are not the intended recipient, an addressee, or the person responsible for delivering this to an addressee, you are hereby notified that reading, using, copying, or distributing any part of this message is strictly prohibited. If you have received this electronic mail message in error, please contact us immediately and take the steps necessary to delete the message completely from your computer system. Thank you.