Don't Bet the Business

Let’s talk a bit about minority oppression claims. 

One of the risks investors assume when acquiring a minority position in a company is that decisions may be made by those in control with which the investor disagrees. Indeed, management is often faced with a myriad of issues that must be addressed without the opportunity to seek input from co-owners of the business. 

In business, as in life, hindsight is 20/20. Absent some contractual right to do so, and such a right would be a rare thing, minority owners of corporations and limited liability companies typically are not able to second guess management’s business judgment. 

The courts are quite comfortable with this limitation. But what about the actions of those in control when they go further than the mere exercise of legitimate business judgment? What about actions that purposefully seek to benefit only those in control to the detriment of the minority owners?  It is in this gap that minority oppression claims exist.

For example, MCL 450.4515 provides that a minority member of a limited liability company can bring a lawsuit to show that the “acts of the managers or members in control of the limited liability company are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member.” MCL 450.1489 provides similar rights to a minority shareholder of a corporation.

What constitutes illegal conduct is often not open to a great deal of debate. Fraudulent conduct by managers or those in control also tend to be more easily spotted. Questions of unfairness and oppression typically arise when facially legitimate business decisions unfairly impact the minority owners who have no say in the decisions being made.

The Michigan courts have ruled that what constitutes “willfully unfair and oppressive conduct” refers to conduct or actions taken which can be shown to substantially interfere with a member or shareholder’s rights as a member or shareholder. So what does this mean?

Member and shareholder interests typically include such things as voting at meetings, electing directors, adopting or changing bylaws or charters, examining the corporate books and records, and receiving distributions or dividends. Employment, which is commonly found in closely held businesses, typically is not found to be among member or shareholder rights. However, MCL 450.4515(2) does provide that termination of employment can constitute willfully unfair and oppressive conduct if “the actions interfere with distributions or other member interests disproportionately as to the affected member.” 

Put simply, minority oppression claims do not exist to permit the second guessing of management when exercising legitimate business judgment. Nor will oppression be found when the acts or conduct of those in control are permitted by the articles of organization, an operating agreement, by any other agreement to which the member or shareholder is a party, or which results from a consistently applied written company policy or procedure. 

That said, when management crosses the line to take actions that constitute “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member” the law provides a remedy to the oppressed.

When actionable oppression is shown, the applicable statutes permit the courts to issue any order or grant any relief “as it considers appropriate.” This statutory grant provides the court with broad authority when relief is warranted.  Such relief can include, but is not limited to, (a) dissolving and liquidating the company and its assets, (b) cancelling or changing any provision in the governing corporate documents; (c) ordering those in control to take, or prohibit, specific actions; (d) ordering the purchase of the minority owner’s interest for fair value, and (e) awarding damages. Plainly, the Michigan Legislature intended that the courts possess the singular authority to do whatever justice requires when responding to oppressive action.

As with other damage claims, when a minority owner seeks damages as a result of oppressive conduct, that claim must be brought three years after the cause of action accrues, or within two years after the minority owner discovers or reasonably should have discovered the cause of action, whichever occurs first.

The Michigan Supreme Court has found that an oppression action accrues when the minority owner “incurs the actionable harm.” Put another way, the oppression claim accrues when the actions of those in control interfere with the minority owner’s interests, entitling the owner to some form of statutory relief. Simply, it is the interference with the minority owner’s interests that is the harm, regardless of whether that harm can then be measured through a monetary award.

Minority oppression claims are not uncommon, but they are often difficult to prove or defend. We have been there before, many times, and it is always helpful to seek input from experienced counsel when such situations arise.