Minority shareholder oppression comes in many different shapes and sizes in Pennsylvania.
Guidance in this area is bereft as Pennsylvania has traditionally had a dearth of case law on the subject. Recently, however, the Court of Common Pleas of Somerset County, Pennsylvania issued a comprehensive eighty-two (82) page opinion analyzing minority shareholder rights and corresponding oppression in Pennsylvania. The key takeaways are as follows:
- A group of shareholders who combine to form a majority have fiduciary duties to the minority shareholders if that majority dominates the Board of Directors and controls the corporation.
- Pennsylvania adopted the “reasonable expectations” test to define oppression. Oppressive actions that substantially defeat the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise will likely constitute oppression.
- While majority shareholders are allowed and permitted to act in their own best interests, they may not use their power in such a way to exclude minority shareholders from their proper share of the benefits accruing to the enterprise.
- The freezing out of a minority shareholder can take the form of excluding the minority shareholder from their proper share of benefits, removing a minority shareholder from office or a position of responsibility, restricting a minority shareholder’s access to the company’s financial documents, or substantially diminishing a minority shareholder’s compensation. Other actions employed against a minority shareholder that may constitute a freeze out include, generally oppressive conduct, withholding of dividends, restricting or precluding employment in the corporation, paying excessive salaries to majority shareholders, withholding information relating to the operation of the corporation, the appropriation of corporate assets, denying minority shareholder’s appraisal rights, failing to hold meetings and excluding the minority from a meaningful role in the decision‑making of the corporation.
- A bad faith attempt to buy out the interests of a minority shareholder can also constitute oppression. Specifically, the majority owes the minority a duty of good faith and fair dealing in the negotiation process involving the purchase of the minority shares.
- The mere fact that the minority may have an interest in a competing corporation does not deprive the minority shareholder of its right to inspect and extract corporate records, unless bad faith or improper purpose is shown.
- The court is permitted to award the minority shareholder damages for what it has suffered as a result of the majority’s actions. That can include the minority’s share of lost profits or benefits improperly taken by the majority. Additionally, the court can order a buyout of the minority’s shares at fair value.
- “Fair value” of the minority shareholder’s interest, and not “fair market value,” can be a proper standard to apply in evaluating a minority shareholder’s interests in a case where minority shareholder oppression is present. Fair value does not take into account any minority or marketability discounts.
Minority shareholder oppression can result in significant damages against the majority shareholders against whom have been proven to have engaged in oppressive conduct. If you are a majority shareholder, remember: Treat the minority shareholder with the requisite care or suffer what can be significant consequences by the court.
This post was written by Brian T. Must and Francesca Iovino
