Reasonable Expectations v. Implied-in-Fact Contracts: Is the Shareholder Oppression Doctrine Needed?

Abstract

The doctrine of shareholder oppression protects the close corporation minority stockholder from the improper exercise of majority control. The law of contracts applies more generally, as it seeks to enforce agreements between parties regardless of a close corporation context. When a close corporation dispute is at issue, however, it is often difficult to tell where contract law leaves off and where oppression law begins.

For example, a number of courts describe oppression as the "frustration of the reasonable expectations of the shareholders." When courts attempt to define a "reasonable expectation" in the shareholder oppression context, the language used is nearly identical to the conventional description of an implied-in-fact contract. Indeed, in the shareholder oppression setting, a reasonable expectation has been defined as an expectation (1) that is "known to or assumed by the other shareholders and [is] concurred in by them"; (2) that is "embodied in understandings, express or implied, among the participants"; and (3) that is often derived "from the parties' actions and course of conduct." Similarly, in a contractual setting, an implied-in-fact contract is generally described as a "true contract" that is "grounded in the parties' agreement and tacit understanding" and whose "existence and terms are inferred from the conduct of the parties." Presumably as a result of these similarities, commentators have also explicitly linked the reasonable expectations analysis of oppression law to the implied agreement analysis of contract law. Reasonable expectations have been described "as an implied multilateral contract among the shareholders," and the reasonable expectations inquiry has been called an "implied contract analysis." What courts and commentators have overlooked, however, is the implication of this comparison. After all, to the extent that the reasonable expectation analysis of oppression law is rooted in contractual concepts, one could fairly ask whether an independent oppression doctrine is needed at all. Instead of concluding that a shareholder is entitled to corporate law relief because of a frustrated reasonable expectation, a court seemingly could reach the same conclusion on the contract law ground that majority action has breached an implied-in-fact contract between the shareholders. The issue that courts and commentators have overlooked, therefore, is a critical one -- i.e., to the extent that a reasonable expectation and an implied-in-fact contract are similar, why were the well-accepted principles of contract law not used directly to remedy the plight of the close corporation shareholder? Why did contract law defer to corporate law to establish protections for minority shareholders in close corporation settings? Given that contract law strives to enforce bargains, should contract law have deferred in this manner? By analyzing facets of the liability and damages components of both oppression law and contract law, this article addresses these significant questions. Moreover, by examining how the shareholder oppression doctrine operates in practice to protect reasonable expectations, this article cuts through the rhetoric of oppression precedents and demonstrates what is actually transpiring in the liability inquiries of many oppression courts. In so doing, this article raises questions regarding whether the protective rationale of the oppression doctrine can apply to other contexts and relationships.

Ultimately, this article reveals that oppression law and contract law are more dissimilar in operation than they appear. Although contract law has the tools to protect the close corporation shareholder, well-entrenched doctrinal hurdles (e.g., indefiniteness, expectation damages) will likely prevent it from doing so. Nevertheless, because oppressive majority conduct breaches an actual bargain between the shareholders, and because the oppressive majority's actions often result in a theft of the minority's investment, contract law should take action to enforce the "deal" and to protect the minority shareholder. Thus, when the oppression doctrine safeguards reasonable expectations, oppression law is effectively stepping in for contract law and is accomplishing what contract law itself should be doing.

Keywords: corporation, oppression, close corporation, closely held, shareholder oppression, fiduciary duty, contract