Shareholder Oppression & Dividend Policy in the Close Corporation
Washington & Lee Law Review, Vol. 60, p. 841, 2003
Corporate Practice Commentator, Vol. 46, p. 355, 2005
84 Pages Posted: 8 Sep 2003 Last revised: 24 Aug 2010
Date Written: August 22, 2010
The receipt of a dividend is perhaps the most basic method by which a shareholder earns a return on its investment in a corporation. Because of the dividend's importance, scholars have long focused their attention on the fundamental question of when judicial intervention into a company's dividend policy is warranted. Significantly, however, this academic focus has concentrated almost exclusively on the publicly-held corporation. In that context, a number of authorities have argued that there is little need for the judiciary to involve itself in compelling the payment of dividends, primarily because of the disciplinary effect of a well-established market.
In the close corporation setting, however, this market-based rationale is wholly inapplicable. A close corporation, by definition, lacks a market for its stock. When close corporation dividend policy is at issue, therefore, a "hands-off" attitude by the judiciary makes considerably less sense. Although other scholars have previously made this observation, the academic discussion has not proceeded substantially beyond the observation itself. It is important, therefore, to return to the fundamental question and to consider it in the close corporation setting - i.e., when is judicial intervention into a close corporation's dividend policy warranted?
To some extent, a consideration of this question has been aided by the development of the shareholder oppression doctrine. The doctrine of shareholder oppression attempts to safeguard the close corporation minority investor from the improper exercise of majority control. By identifying and protecting the "reasonable expectations" of close corporation shareholders, including the reasonable expectation of dividends, the oppression doctrine combats majority shareholder efforts to exclude a minority investor from the company's financial and participatory benefits. Although the doctrine usefully acknowledges that close corporation shareholders can have reasonable expectations of dividends, the doctrine provides no guidance on whether an asserted expectation is "reasonable," and thus enforceable, in the particular circumstances before a court. One could argue, therefore, that the shareholder oppression doctrine has simply rephrased the fundamental question. Asking whether judicial intervention into a close corporation's dividend policy is warranted, in other words, is functionally equivalent to asking whether a shareholder's expectation of dividends is "reasonable" in the circumstances.
This article squarely addresses the issue of close corporation dividend policy and the question of when judicial intervention is warranted. More specifically, this article analyzes close corporation dividend disputes through the lens of the shareholder oppression doctrine. By examining when a shareholder's expectation of dividends is reasonable and enforceable, this article moves beyond the mere observation that close corporations require greater judicial scrutiny. Indeed, the article discusses the basic types of dividend disputes that arise in close corporations and provides guidance to courts for resolving such disputes.
Keywords: corporation, oppression, close corporation, closely held, shareholder oppression, fiduciary duty, dividend, dividends
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