Shareholder Oppression

Stock Photo Oppression 061714A non-controlling or minority shareholder in a close corporation who is the victim of “oppression” by the controlling or majority shareholder may petition a court for dissolution of the corporation or, in other words, a business divorce. 805 ILCS 5/12.56.

This remedy exists because the shareholder in a close corporation does not have the exit option available to the shareholder of a public corporation — who can sell his or her shares in a public securities market if unhappy with those in control.

So what is “shareholder oppression”? While there is no clear answer, courts define it as “arbitrary, overbearing and heavy-handed conduct,” that prejudices the minority shareholder, such as taking an excessive salary, failing to call meetings of the board of directors, or failing to pay dividends. However, defendants in these cases usually claim that these management decisions deserve protection under the “business judgment rule,” which provides that officers and directors cannot be held to a standard that ensures corporate success and, thus, courts will not second-guess business decisions made in good faith, with reasonable care and reasonably believed to be in the best interests of the corporation.

Further complicating matters is that conduct that may be considered oppressive under one set of circumstances may not be in another. As one court noted, the payment of large salaries to corporate officers may be justified where a corporation has large retained earnings, but oppressive where a corporation is rendered unable to pay dividends to minority shareholders because of large salaries paid to majority shareholders. The failure to pay dividends might be oppressive when the corporation retains large earnings for no reason except to “freeze out” minority shareholders.

The case Gidwitz v. Lanzit Corrugated Box Co., provides an example of oppression. The case concerned a corporation where the shares were split equally between members of two different families. However, one of the two families — the Gidwitz family — controlled the company through Joseph Gidwitz — the President and Chief Executive Officer of the company. For many years, he operated it as if it was a sole proprietorship. The court concluded that the following circumstances constituted oppression: officers were hired and salary increases were given without director approval, loans were made to corporations in which the President had an interest without board approval, a subsidiary was created without board approval, and the question of whether to pay dividends was never presented to the directors.

(This is for informational purposes and is not legal advice.)

 

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