Don't Bet the Business

In the past, I’ve written about minority oppression claims. Today, we go a bit deeper into the subject and focus on shareholder oppression claims.

MCL 450.1489 is commonly known as the shareholder-oppression statute. In §1489 of the state’s Business Corporation Act, the Michigan Legislature created a cause of action available to minority owners of closely held corporations. The Act applies when certain actions of directors or those in control of the corporation interfere with the minority shareholder’s property rights.

Specifically, §1489(1) provides that a minority shareholder can bring a lawsuit “to 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.”

The Michigan Supreme Court has analogized claims arising under §1489 to certain shareholder derivative claims against directors or those in control to remedy alleged fraud, illegality, abuses of trust, or other oppressive conduct. Under the common law, minority shareholders also could sue for corporate dissolution when faced with oppressive conduct.

The remedies available under these common law claims were viewed as equitable. Accordingly, when the Legislature bundled similar rights and remedies in §1489 the Supreme Court determined that they, too, were equitable such that §1489 claims must be tried to a court rather than a jury.

One of the practical realities of owning an interest in a closely held corporation is that there likely is no ready market for a minority shareholder’s shares. Indeed, owners in such businesses typically expect to benefit from the company through employment or from the distribution of profits, and not from gains realized from the sale of one’s shares.

For this reason, the Legislature later amended §1489 to provide that willfully unfair and oppressive conduct can include any act that interferes with a shareholder’s interests as a shareholder. MCL 450.1489(3) provides:

As used in this section, “willfully unfair and oppressive conduct” means 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 is proportionately as to the affected shareholder. The term does not include conduct or actions that are permitted by an agreement, the articles of incorporation, the bylaws, or a consistently applied written corporate policy or procedure.

Recently, the Michigan Court of Appeals was asked to decide if actions alleged to have violated §1489 must be intentional. In other words, must a plaintiff prove that the corporate actors subjectively “intended” their actions to be unfair and oppressive or can an oppressive outcome be enough to result in liability and recoverable damages?

Nothing in §1489 speaks to an actor’s intent. However, the appellate court was not persuaded by that omission, reasoning that to eliminate proof of wrongful intent would mean that §1489 was in fact a strict-liability act, and the appellate court found nothing in §1489 to support such a conclusion.

Instead, the appellate court reasoned that by grouping the terms “illegal, fraudulent, or willfully unfair and oppressive” together the Legislature intended that they should be given a related meaning. Because performing an illegal or fraudulent act commonly includes a showing of some malevolent intent, the appellate court concluded that grouping those terms together with “willfully unfair and oppressive” acts meant that the Legislature required proof of an intention to act unfair and oppressive toward the minority shareholder.

The appellate court added that the Legislature’s inclusion of “willfully” when speaking of unfair and oppressive conduct buttressed that conclusion that a showing intent is required under §1489. Indeed, a “willful” act is one done to bring about a particular result. As such, in the context of a §1489 claim, the Legislature meant that directors or persons in control of a closely held company – to violate §1489(1) – must be proven to have acted “to bring about an unfair and oppressive result.”

Because a plaintiff must prove intent to prevail under §1489, a defendant may avoid §1489 liability by proving that he or she did not intend to bring about an unfair and oppressive result. For example, the defendant may show that the actions taken were intended to achieve a legitimate business purpose even though the result may have been to substantially interfere with the minority shareholder’s interests as a shareholder.

There is much more to a §1489 claim than can be discussed here. If you have questions, we can help.