Shareholder oppression, fiduciary duty and corporate disputes in closely related companies (2023)

Shareholder harassment claims are important tools available to minority shareholders who believe they are victims of abuse and abuse by those who control the corporation. With few exceptions, minority shareholders do not control the company's affairs and are often unable to prevent the majority from taking unfair or repressive action against them. Since there is no liquid or easily accessible stock market in closely structured companies, minority shareholders cannot easily escape oppressive behavior by selling their shares.1Often the only recourse for an oppressed minority shareholder is judicial redress in the event of shareholder oppression or breach of fiduciary duty.2

Given that victimization claims are a type of specific statutory and case law of each state, there is no single standard nationwide for when "oppression" has occurred. In some states, statutory prohibitions against oppression do not actually define oppressive behavior.3In other states, statutes contain detailed definitions of oppression. For example, Michigan's Shareholder Oppression Act defines "intentionally unfair and oppressive conduct" as "continuing conduct or significant action or series of actions that significantly interfere with a shareholder's interests as a shareholder."4However, this statutory definition is open to interpretation and courts often analyze it in relation to traditional fiduciary duties.5

Since there is no uniform legislative direction to define repression across jurisdictional boundaries, various courts have developed several definitions. For example, some courts have defined repression as "nuisance, harsh and unlawful conduct ... or a visible departure from standards of fair conduct and violation of fair play" which the shareholder has the right to rely on.6Other courts have simply equated oppression with a breach of fiduciary duties of good faith and loyalty to shareholders close to the corporation.7Another common approach is the "reasonable expectations test". Courts applying this test have defined oppression as "the destruction of the legitimate expectations of corporate shareholders."8

Regardless of the criterion used, courts will generally recognize that "oppression" is a broad term that encompasses many situations of misconduct that may or may not be illegal or fraudulent.9

A review of the jurisprudence reveals some common behavior that courts may find oppressive, regardless of the criterion used. They include:

  • Not paying dividends when the corporation has the financial means to do so10
  • Causing the corporation to pay majority shareholders compensation that is excessive and unfair to the minority and/or corporation11
  • Payment of compensation to majority shareholders in the de facto amount of dividend, excluding the minority shareholder12
  • Denying shareholders a stake in the management of the company or a voice in decision-making processes13
  • Attempting to implement an unfair buyout plan that favors majority shareholders14
  • Failure to provide a minority shareholder with documents necessary for the correct assessment of his interests when selling his shares15
  • Not allowing minority shareholders to participate in capital calls or otherwise hedge against dilution of their capital16
  • Using corporate funds to cover personal expenses of other shareholders or related parties (such as family)17
  • Failure to provide financial statements or other information that shareholders are entitled to receive18
  • Engaging in actions to freeze a minority shareholder outside the corporation instead of giving them a fair share of their investment19
  • Refusal to return the shareholder's capital while refusing to buy back the shareholder's shares for fair value20

It is impossible to draw up an exhaustive list of potentially oppressive acts, given the flexible definition of "oppression" and the case-by-case approach in which the term is used. Moreover, acts of oppression rarely occur in isolation. Instead, each act of oppression is often part of a series of actions by the majority against the minority.21

Shareholder agreements are particularly relevant to oppression claims

Often, shareholder oppression claims involve failure by most of the parties' agreements. This is due to the fact that the agreements governing the parties are highly relevant to the interests and expectations of the shareholders. INMadugula v. Taub, 2012 WL 5290285(Mich. Ct. App. Oct. 25, 2012), for example, a trial court found oppression based, inter alia, on breach of the majority shareholder agreement provision. On appeal, the defendant argued that this was tantamount to acknowledging that a breach of shareholder agreements necessarily constitutes shareholder oppression and not a mere breach of contract.22The Michigan Court of Appeals disagreed and ruled that the majority rule was "very relevant in determining whether [plaintiff's] interests as a shareholder were materially affected because [this] rule spells out in detail what [complainant's] interests and rights are."23At the time of submission of this article, Madugula's case is pending before the Michigan Supreme Court and was heard by Gerard Mantese, one of the authors of this article.

The court in Ballard v. Roberson, 733 SE2d 107 (SC 2012), found a tribulation in which the defendants authorized the issuance of 900,000 new shares in violation of the parties' share purchase agreement and articles of association. While stating the repression, the court emphasized that this share issue was in direct contradiction with both the articles of association and the share purchase agreement.24However, like the Madugula court, the Ballard court did not base its decision solely on contract violations, noting that the violations were part of a larger plan to freeze minority shareholders from the business.25Violations of these agreements were evidence of oppression and oppressive patterns, but they were not necessarily oppressive in themselves.

Minority shareholders should remember that while a breach of contract may constitute oppression, shareholders' oppression claims will not necessarily protect minority shareholders from arm's length deals.26

Dissolution of a shareholder's employment as an act of oppression

Shareholder employment is another issue that often comes up in the context of shareholder oppression litigation. The classic method of freezing minority shareholders is to remove them from their positions in the company. Termination of employment is a powerful freezing technique because in a strict corporate context, shareholders often do not receive dividends. Instead, the return on their investment often comes from their salary as an employee. Dismissal of a minority shareholder may effectively defeat the minority shareholder's objective of becoming a shareholder.27

A number of courts have held that continued employment is in the interest of shareholders, as long as the expectation of employment is reasonable in the circumstances.28However, termination of employment is unlikely to conflict with the shareholder's legitimate expectations if the shareholder does not receive financial compensation for the employment and does not have a contract requiring employment.29

Statutory language may affect whether a claim of harassment can be based on termination of employment. For example, prior to the Michigan Oppression Act Amendments of 2006, the Michigan Court of Appeals ruled that termination was not oppression. At the time, Michigan's statute defined oppression simply as "continuing conduct or significant action or series of actions that significantly interfere with a shareholder's interests as a shareholder."30The Michigan Court of Appeals ruled that employment with the company was not in the "shareholder's interest as a shareholder" and that the charter only protected the shareholder's interests "as a shareholder".31In response, the Michigan legislature amended the Oppression Act in 2006, clarifying that oppression may include "termination of employment or reduction of employee benefits to the extent that these actions interfere with payroll or other shareholder interests disproportionately to the affected shareholder."32

Typical remedies in cases of shareholder oppression

While jurisdictions vary in the remedies available to oppressed shareholders, the most common remedies in cases of oppression are compensation, redemption (or purchase) of minority shareholder shares, or dissolution of the company.

In some states, claims of reprisal arise from and are based on the Dissolution Acts.33Hence the use of a dissolving agent. But even where claims of reprisal are pursued under the dissolution statute, some courts have ordered the redemption of minority shareholder shares instead of dissolution of the company.34Other courts have ruled that they are bound by their dissolution statutes and are not allowed to create other measures.35

Other states have broader oppression laws that provide the courts with numerous remedies, including dissolution, shareholder buyback, appointment of a trustee, injunction, or monetary damages.36For example, in the Madugula case, the court awarded both monetary damages and redemption of the plaintiff's shares at fair value.37Redemption of minority shareholder shares is probably the most common measure against shareholder repression. As such, the parties will typically need evidence – usually in the form of expert testimony – of fair value, i.e. the value of the stock based on its proportionate share of the corporation's value as a going concern.38

Experts – especially valuation experts – are extremely important in oppression cases

The effective use of experts can be crucial to a shareholder harassment litigation, especially when it comes to the valuation of minority shareholder shares. Judges and juries are not experts in business valuation, and a plaintiff without sufficient evidence at a minority shareholder's share value hearing risks ruling in favor of the defendants.

WGinnar przeciwko Advanced Design and Prototype Tech., Inc.,2012 WL 4465191 (Mich. Ct. App. Sept. 27, 2012), the presiding judge was so dissatisfied with the expert opinion submitted by the parties regarding the value of the plaintiff's shares that he appointed his own independent expert.39When the forensic expert was unable to value the shares due to the lack of documents requested by him, both parties agreed that they did not want to spend any more money on further appraisal by the forensic expert. Accordingly, the expert provided an estimated valuation of the plaintiff's shares in the range of USD 600,000 to USD 1,000,000. The court of first instance considered this too speculative and did not award compensation.40The appellate court asked to determine the degree of certainty required to reach a verdict

damages in a strictly controlled corporation, and the appropriateness of other remedies in addition to a buyout.41

Expert testimony in shareholder oppression cases can be useful outside the context of stock valuation. INColgate v Disthene Group85V cir. 286, 2013 WL 691105 (Va. Cir. Ct. 2012), the court heard expert testimony on various topics regarding both liability and damages. For example, an expert opinion was provided as to whether the defendants' remuneration was excessive compared to compensation paid to comparable officers in other companies.42The parties also submitted auditors to testify as to the value of the company's assets used by the defendants for personal purposes without compensation.43The same accountants testified whether the cut in dividends was financially necessary.44The court even heard the testimony of a professor presented as an expert in "corporate governance matters".45

Traditional defenses against corporate decisions may not be available

Oppression claims have a unique relationship with traditional defenses of corporate decisions, such as the business judgment principle. In principle, the doctrine of business judgment will protect the majority when a claim of oppression is based on alleged mismanagement, but such protection may not be available in the case of a minority freeze. For example, a decision to pay a dividend is usually considered a discretionary action by the board of directors protected under the Business Judgment Principle.46And courts typically recognize that the conduct in question cannot constitute intentional oppression when the majority reasonably rely on the advice of corporate lawyers or other outside counsel.47But this majority must be composed of independent and disinterested individuals for the principle of business judgment to apply.48

For this reason, the principle of business judgment often does not apply in the context of shareholder oppression because the majority is not disinterested. Oppression claims by shareholders are typically breaches of fiduciary duties, including the duty of loyalty and good faith of the majority concerned. For example, New Jersey courts have ruled that the New Jersey Oppression Act demonstrates the legislative determination that corporate law principles, such as the business judgment principle, have failed to stop the oppressive conduct of majority shareholders.49Similarly, the Texas Court of Appeals ruled that a corporation's interest in managing its affairs did not include the right to significantly exceed the legitimate expectations of minority shareholders.50Wone w. Jacobs, 834 A.2d 546 (Pa. Super. 2003), the court ruled that the rule of business judgment does not relieve the defendant of liability when the case concerns the alleged freezing of participation in corporate governance and not the powers of the corporation to manage its assets and conduct its business.51

Parties should pay attention to implied partnerships

Finally, a few words should be said about the possibility of an implied partnership between shareholders in a capital company. INByker v. Mannes, 641 N.W.2d 2010 (Mich. 2002), for example, the plaintiff claimed that he had an overarching, unwritten "general partnership" with the defendant, while the defendant claimed that he only invested in certain business ventures and never agreed to a general partnership. The Michigan Supreme Court ruled that the subjective intent to form a partnership is irrelevant if the conduct of the parties indicates an intention to continue as co-owners of the business for profit.52According to Byker, implied partnership claims can be a powerful weapon for plaintiffs in some contexts and a nasty surprise for unwary defendants.

Courts usually recognize that a partnership may arise from the circumstances of the interests of the parties.53Where parties "put their money, assets, manpower, or skills into a trade with the understanding that the profits would be shared between them[], the result is a partnership, whether or not the parties understood that this would be the case."54

Most courts will not recognize a partnership solely on the basis of a mere assertion by a party of the existence of a partnership, when there is no evidence of an agreement on a joint business agreement.55The factors relevant to the determination of a partnership are: 1) profit sharing, 2) loss sharing, 3) ownership of the partnership's assets, 4) co-management and control, 5) joint and several liability to creditors, 6) intention of the parties, 7) compensation, 8) capital contributions and 9) loans to the organization.56Profit or loss sharing agreements are particularly important for proving a partnership.57

The issue of partnership is significant because the fiduciary duties of partners are particularly broad, "associated not only with honesty, but with the most delicate punctilio of honor."58If the plaintiff shareholder can form an overriding partnership, the defendant may be subject to more liability than would be permitted under ordinary corporate law rules.


While shareholder oppression statutes and case law vary somewhat from state to state, there are certain trends in shareholder oppression law that emerge no matter where the case is heard. Despite various tests defining oppression, efforts to withhold payments from minorities, deprive them of their investment returns, dilute their shares, or otherwise freeze them from the company are generally considered oppressive. In addition, unless the law provides otherwise, termination of the employment relationship of a minority shareholder with a closely related company may constitute repression, especially in cases where the shareholder does not receive other financial benefits resulting from being a shareholder. These actions are typically not protected by the business judgment principle because, rather than being good faith decisions by independent directors, they are deliberate acts of disloyalty designed to benefit the majority at the expense of the minority. When a shareholder oppression dispute arises, it is a good idea for the parties to seek the right experts early on, both on substantive issues and in matters of stock valuation and forensic accounting.

Guest author:

Gerard V. Mantese

David F. Hansma


1Muellenberg v. Bikon Corp., 669 A.2d 1382, 1386 (NJ 1996).
2Estes v. Idea Engineering & Fabricating, Inc., 649 NW2d 84, 90-91 (Mich. Ct. App. 2002).
3See, for example, Vis.Stat. § 180.1430.
4Mich. Comp. Law § 450.1489(3).
5See Bromley v. Bromley, 2006 WL 2861875 at *5 (E.D. Mich. Sept. 28, 2006) ("It is reasonable to conclude that the type of conduct constituting a breach of fiduciary duties in close corporations is the type of conduct prohibited by § 450.1489").
6Buar v. Buar Farms, Inc., 832 NW2d 663 (Iowa 2013) (internal quotations and quotation marks omitted).
9See, e.g., Balvik v. Sylvester, 411 N.W.2d 383, 386 (N.D. 1987).
10Schimke v. Liquid Dustlayer, Inc., 2009 WL 3049723 at *5 (Mich. Ct. App. Sep. 24, 2009); Colgate v. Disthene Group, 85 Va. cir. 286, 2013 WL 691105 at *8-9 (Va. Cir. Ct. 2012).
11Colgate, as above in *15.
12Argo Data Resource Corp. v. Shagrithaya, 380 SW3d 249, 268 (Tx. Ct. App. 2012).
13Booth v. Waltz, 2012 WL 6846552 at *22 (Conn. Supr. Ct. December 14, 2012); Berger v. Katz, 2011 WL 3209217 at *15 (Michigan Ct. App. July 28, 2011); For Solution Clever Innovations, Inc., 94 AD3d 1174, 1176 (NY App. Div. 2012); Kaible v. Gropack, 2013 WL 2660995 at *4 (NJ App. Div. Jun 14, 2013).
14Schimke, as above in *3; Colgate, as above in *10.
15Bull przeciwko BGK Holdings, LLC, 859 F. Supp. 2d 1238, 1242 (DNM 2012).
16Fox v. Idea Sphere, Inc., 2013 WL 1191743 at *14-15 (SDNY Mar. 21, 2013).
17Cardiac Perfusion Services, Inc. v. Hughes, 380 S.W.3d 198, 201 (Tx. Ct. App. 2012).
18Baker v. Baker, 2011 WL 3505500 at *5 (Neb. Ct. App. August 9, 2011).
19Pointer v. Castellani, 918 NE2d 805, 816 (Mass. 2009); Bluewater Logistics, LLC v. Williford, 55 So.3d 148, 161 (Miss. 2011).
20Bauer w. Baur Farms, Inc., 832 NW2d 663, 671 (Iowa 2013).
21Kiriakides przeciwko Atlas Food Systems & Services, Inc., 541 SE2d 257, 267 (SC 2001).
22Madugula v. Taub, 2012 WL 5290285 at *3 (Michigan Ct. App. Oct. 25, 2012).
24Ballard v. Roberson, 733 SE2d 107, 111-12 (SC 2012).
25ID. See also Adler v. Tauberg, 881 A.2d 1267, 1270-1271 (Pa Super Ct, 2005) (supporting a finding of oppression where defendants transferred shares "in violation of the parties' agreement"); Simms v. Exeter Architectural Products, Inc, 868 F Supp 668, 673 (MD Pa, 1994) ("Plaintiff's allegations of wrongful termination ... and Defendants' deliberate disregard of shareholder purchase and sale agreements certainly raise the issue of oppression [.]").
26See, for example, Kortum v. Johnson, 755 NW2d 432, 445 (ND 2008).
27Knights’ Piping, Inc. v. Knight, 123 So.3d 451, 458 (Miss. Ct. App. 2013).
28See e.g. Ritchie v. Rupe, 339 SW3d 275, 291 (Tex. Ct. App. 2011).
29Mueller v. Cedar Shore Resort, Inc., 643 NW2d 56, 65-66 (SD 2002).
30Mich. Comp. Law § 450.1489(3).
31Franchinus v. Franchino, 687 NW2d 620, 628-30 (Mich. Ct. App. 2004).
32Mich. Comp. Law. § 450.1489(3). See, e.g., Berger v. Katz, 2011 WL 3209217, at *5 (Mich App, July 28, 2011) ("[The Articles of Association] now allow a minority shareholder to claim willful unjust and oppressive conduct as a result of salary reduction or other employee benefits[.]").
33See e.g. Ritchie v. Rupe, 339 SW3d 275, 291 (Tex. Ct. App. 2011).
34See, for example, Hayes v. Omsted & Associates, Inc. 21 P.3d 178, 181 (Or. Ct. App. 2001) ("Where appropriate, a court may order a compulsory buyout of minority shareholder shares in lieu of corporate shares as a remedy for oppressive behavior."); Spears v. Com Link, Inc., 837 NW2d 680 (Iowa Ct. App. 2013).
35Colgate, as above in *5.
36See e.g. Mich. comp. Law. 450.1489(1); NJSA 14A:12-7(1).
37Madugula, as above in *1.
38Hayes, above.
39Ginnar v. Advanced Design and Prototype Tech., Inc., 2012 WL 4465191 at *1 (Mich. Ct. App. Sep. 27, 2012).
41ID. w *3.
42Colgate, as above in *15.
43ID. o *18-21.
44ID. o *9.
45ID. o *13.
46Renbaum przeciwko Custom Holding, Inc., 871 A.2d 554, 569 n.22 (Md. Ct. App. 2005).
47Schaefer v. Uliński, 644 N.W.2d 293 (Wis. 2002).
48Carsanaro v. Bloodhound Technologies, Inc., 65 A.3d 618, 637 (Del. Ch. 2013).
49grateful in. Grateful, 639 A.2d 390, 396 (1994).
50Ritchie, see above at 296
51Viener v. Jacobs, 834 A.2d 546, 557 (Pa. Super. 2003),
52Byker v. Mannes, 641 NW2d 210, 218 (Mich. 2002).
53Baggett v. Baggett, 2013 WL 4606383 at *8 (Tenn. Ct. App. Aug. 26, 2013).
54Finch v. Raymer, 2013 WL 1896323 at *9 (Tenn. Ct. App. May 6, 2013).
55Carlson v. Ismail, 2012 IL App (3d) 110566-U (Ill. Ct. App. Sept. 13, 2012).
56Ashlock v. Slone, 2012 WL 3055775 at *7 (SDNY July 26, 2012).
57id.; DiPasquale, supra.
58Urbain v. Beierling, 835 NW2d 455, 460 (2013). See Meinhard v. Salmon, 245 NY 458, 464 (1928).


What are the fiduciary duties of shareholders in a closely held corporation? ›

The following are some of the fiduciary duties shareholders in a closely held corporation may owe other shareholders and the corporation; Duty to act in good faith. Duty to be honest. Duty to be loyal.

What is an example of shareholder oppression? ›

Common Examples of Shareholder Oppression

Refusing to allow a minority shareholder to inspect the company's books and records. Draining company profits through inflated salaries and bonuses to the majority, leaving little or nothing to distribute in dividends. Locking a minority shareholder out of company property.

Can a shareholder sue a company for breach of fiduciary duty? ›

A shareholder derivative action is a lawsuit brought by a shareholder or group of shareholders for the benefit of a corporation that challenges the breaches of fiduciary duty to shareholders by officers and directors of the corporation. Through this type of legal action, investors can hold wrongdoers accountable.

Do controlling shareholders of a corporation may have a fiduciary duty to the corporation and to the other shareholders? ›

Control shareholders have a fiduciary duty to the minority shareholders to act with “good faith and inherent fairness.” As such, majority owners have a fiduciary responsibility not to use their influence to engage in self-dealing, including actions that are unfairly prejudicial to the minority shareholders.

What are the five fiduciary duties? ›

What Are the Primary Fiduciary Duties?
  • Duty of Care.
  • Duty of Loyalty.
  • Duty of Obedience.
  • Duty of Confidentiality.
  • Duty of Prudence.
  • Duty to Disclose.
Mar 21, 2023

Do companies owe fiduciary duties to shareholders? ›

Although a shareholder may be part owner of a corporation, he generally has no control over the day-to-day management of the corporation. The board of the directors and the officers have direct control over the corporation, and therefore they owe fiduciary duties to the owners, who are the shareholders.

What is shareholder oppression cause of action? ›

As formulated in Davis v. Sheerin and followed by other courts of appeals, the shareholder oppression cause of action protects minority shareholders' reasonable expectations from being substantially defeated by the actions of controlling shareholders.

What is the remedy for shareholder oppression? ›

The courts sometimes make oppression remedies available. An oppressed minority shareholder can ask the court to dissolve the corporation or hold the corporation's leaders accountable for their fiduciary responsibilities.

What is a shareholder oppression claim? ›

The oppression remedy is a powerful remedy that courts can order where the conduct of a corporation or its directors is unfairly prejudicial to shareholders, other directors, or officers of the corporation.

How do you prove breach of fiduciary duty? ›

Winning a Breach of Fiduciary Duty Complaint

The plaintiff must prove that the defendant failed their duty by withholding pertinent information, by misappropriating funds, abusing their position of influence, failing in their responsibilities or misrepresenting the statement of fact.

How do you prove damages in breach of fiduciary duty? ›

Here, you must demonstrate what the fiduciary did that fell short of their duty. If you are arguing that the fiduciary was careless, you will need to prove what they did or did not do. For example, if they caused you a significant loss by not doing due diligence on a transaction, you must prove what work they did.

What relief can you get for breach of fiduciary duty? ›

To address breaches of fiduciary duty, commercial litigation provides several legal remedies. The most common remedy is monetary damages, which will compensate the plaintiff(s) for the harm caused by the fiduciary's breach.

Are corporations legally responsible for shareholders? ›

A corporation's board owes its “fiduciary duties” exclusively to shareholders, meaning that the board, as it makes decisions, is solely accountable to shareholders.

Do shareholders have the right of control over a corporation? ›

In large publicly traded corporations, shareholders own the corporation but have limited power to affect decisions. The board of directors and officers exercise much of the power. Shareholders exercise their power at meetings, typically through voting for directors.

What is a breach of fiduciary duty? ›

Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure. It has been successfully argued that an employee may have a fiduciary duty of loyalty to an employer. A breach of fiduciary duty occurs when a fiduciary fails to act responsibly in the best interests of a client.

What is the duty of loyalty in a closely held corporation? ›

The duty of loyalty means the officer or director will be guided in their decisions by the company's best interests, not their own self-interest. If someone with a fiduciary duty fails in that duty, they can be held personally liable for the consequences.

Do shareholders have a duty to the company? ›

Shareholders are not responsible for the company's legal obligations or debt as companies are separate legal entities. As such, a shareholders: liability is limited to the unpaid amount of their shares; and. obligations are expressed in the company constitution or shareholders agreement.

Do corporate board members have a fiduciary duty? ›

Fiduciary Duties of Board of Directors in a Corporation

Board of directors have a fiduciary duty to exercise due care in how they manage a corporation's affairs and also have the duty of loyalty and obedience to the corporation.


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