Shareholder Oppression in Michigan: More Than Just the Short End of the Stick
Any time a group of people (i.e., 3 or more) makes decisions – whether in politics, business, or choosing what kind of pizza to order – those in the minority inherently have less power than those in the majority. Being in the minority means you are often on the losing side of votes, with your opinions and views perhaps considered but ultimately disregarded. This dynamic plays out in closely held corporations all the time.
But while minority shareholders in closely held corporations may not have control, they do have rights. When majority shareholders abuse their power by acting in inappropriate, illegal, or “oppressive” ways, Michigan law provides minority shareholders with mechanisms to protect their rights and the corporation from the majority’s malfeasance.
What Is Shareholder Oppression?
Being on the losing side of votes in a closely held corporation may be frustrating and disappointing, but it is not inherently oppressive to trigger the rights and remedies provided in Section 489 of the Michigan Business Corporation Act (the “Act”). Those rights and remedies – including dissolution of the company –become available when a shareholder can “establish that the acts of the directors or those in control of the corporation are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder.”
Section 489 of the Act defines “willfully unfair and oppressive conduct” as follows:
“a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder. Willfully unfair and oppressive conduct may include the termination of employment or limitations on employment benefits to the extent that the actions interfere with distributions or other shareholder interests disproportionately as to the affected shareholder.”
In addition to the examples above, acts that could potentially support a claim of shareholder oppression include:
- Forcing a minority shareholder to sell their shares at an unreasonably low share amount.
- Freezing out a shareholder, making their shares essentially worthless through corporate restructuring.
- Locking a shareholder out of the company’s place of business.
- Refusing to allow a shareholder to inspect the company’s business records.
- Creating a redemption plan for stocks that only favors the majority shareholders.
- Engaging in a transaction that cuts minority shareholders out of fair compensation.
- Refusing to notify shareholders of official shareholder meetings.
- Trying to alter minority shareholder terms to reduce the minority shareholder’s rights.
- Falsifying company records or books.
- Paying for personal expenses of majority shareholders with corporate funds.
Intent Behind Majority’s Actions, Not the Effect of Those Actions, Is Key to an Oppression Claim
A lengthy and impactful 2019 Michigan Court of Appeals decision refined how courts should evaluate shareholder oppression claims, focusing on the majority’s intent when taking actions and making decisions rather than the oppressive effect those actions and decisions may have on the minority.
In Franks v. Franks, 330 Mich. App. 69 (2019), the Michigan Court of Appeals held that the statutory definition of oppression focuses on “the majority’s conduct rather than the effect of that conduct on the minority” and that “the Legislature required proof of an intent to act in a manner that was unfair and oppressive to the shareholder” to establish shareholder oppression.
Accordingly, “a defendant can avoid liability by showing that he or she did not have the requisite intent when he or she took the acts that interfered with the shareholder’s interests.”
Business Judgment Rule Is Not a “Get Out of Oppression Free” Card
In Michigan, as in most states, the “business judgment rule” protects corporate decision-makers from “Monday morning quarterbacking” by courts or others when their decisions or acts negatively impact the corporation or its shareholders. But the rule does not apply to “bad faith” decisions or actions.
Accordingly, the Franks court held that “the business judgment rule does not prohibit a court from evaluating defendants’ business decisions—including their dividend policy—in light of the totality of the evidence to determine whether the evidence showed that defendants formulated their policy in bad faith and as part of a plan to commit acts amounting to shareholder oppression under MCL 450.1489(1).”
Statutory Remedies for Shareholder Oppression
If a court determines that a majority is acting oppressively towards a minority shareholder in a closely held Michigan corporation, the Act provides several potential remedies to protect the rights and interests of minority shareholders, including but not limited to:
- The dissolution and liquidation of the assets and business of the corporation.
- The cancellation or alteration of a provision in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
- The cancellation, alteration, or injunction against a resolution or other act of the corporation.
- The direction or prohibition of an act of the corporation or shareholders, directors, officers, or other persons party to the action.
- The purchase at fair value of a shareholder’s shares, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.
- An award of damages to the corporation or a shareholder.
While minority shareholders may often find themselves on the short end of the voting stick, Michigan law gives them a powerful statutory stick to fight back when majority shareholders abuse their power.
If you have questions or concerns about shareholder oppression in Michigan, please contact Stewart Weiner at Maddin Hauser.