A Voice-Based Framework for Evaluating Claims of Minority Shareholder Oppression in the Close Corporation
Georgetown Law Journal, Vol. 97, 2009
50 Pages Posted: 16 Oct 2008 Last revised: 16 Apr 2010
Date Written: October 15, 2008
Ordinary principles of corporate governance leave minority shareholders in close corporations vulnerable to oppression: majority shareholders have broad discretion to make employment, dividend, and other business decisions that may disadvantage the minority. Unlike shareholders in public corporations, minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. There is, by definition, no secondary trading market for close corporation stock. Because minority shareholder oppression is made possible by the normal features of the close corporation, courts face the difficult task of adjusting the relationship of shareholders to remedy oppression without thereby undermining the reasons investors have for choosing the close corporation form in the first place.
This Article contends that voice offers an under-appreciated alternative mechanism to exit for protecting minority shareholder interests. For reasons analogous to those offered in favor of deliberation in the public sphere, enhanced minority participation in close corporation governance would improve the quality and the perceived legitimacy of decision-making. Also, minority shareholders often expect to have a role in the management of the business and ought to be encouraged to assume that responsibility.
To create greater incentives for voice and to guide the adjudication of claims of minority shareholder oppression, courts should: (1) recognize (and embrace) the principle that the appropriate level of judicial scrutiny may vary from case to case; and (2) use the presence or absence of minority shareholder participation in governance to determine the proper level of scrutiny. Close corporations would then have reason to adopt inclusive governance models in order to benefit from more deferential judicial review, and enhanced minority shareholder voice would improve the parties' ability to resolve disputes without the need for judicial intervention. When litigation cannot be avoided, flexible judicial scrutiny would improve upon existing approaches to shareholder oppression, allocating pleading or production burdens to the party best able to meet them.
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