Shareholder Oppression in Close Corporations: The Unanswered Question of Perspective

Abstract

The doctrine of shareholder oppression protects the close corporation minority stockholder from the improper exercise of majority control. A minority shareholder's chance of success in an "oppression" action, however, may very well depend on the perspective from which shareholder oppression is viewed. On the one hand, some courts view shareholder oppression from a majority perspective - a perspective that focuses primarily on the conduct of the majority. On the other hand, some courts view shareholder oppression from a minority perspective - a perspective that focuses primarily on the effect of that conduct on the minority shareholder. Whereas a majority-perspective court finds oppression liability when the majority's actions are not justified by a legitimate business purpose, a minority-perspective court generally finds oppression liability when majority actions, whether justified or not, harm the interests of a minority shareholder. By exploring the operation of the perspectives in their "pure" and "modified" formulations, this article contends that the choice of perspective can make an outcome-determinative difference in a number of cases. More importantly, however, this article confronts the harder question -- from which perspective should shareholder oppression be viewed?

To answer this question, Professor Moll constructs hypothetical bargains between reasonable close corporation shareholders and makes informed assumptions about the results of those bargains. In so doing, Professor Moll argues that the modified minority perspective is the only approach that enforces the likely understandings that reasonable investors would have reached if, at the venture's inception, they had bargained over the protection of their investments and the prerogatives of the majority. Indeed, because the close corporation investment is typically comprised of more than a mere financial stake in the corporation's success, this article asserts that reasonable close corporation shareholders would not reach an understanding that any majority conduct benefitting the corporation is permissible. Courts should recognize, in other words, that the majority perspective of oppression is flawed due to its implicit assumption that reasonable close corporation shareholders are solely concerned with maximizing the profits of the business. Because the modified minority perspective recognizes that profitable and "legal" corporate conduct must be prohibited in certain circumstances, such a perspective is a superior approach to the shareholder oppression doctrine.

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