IN BRIEF
- Conscious of the ability of lower courts to observe, and guided by the breadth of its equitable discretion, appellate courts have been known to approve sensible, if not unusual, orders.
- A recently Mississippi Supreme Court case appears to stretch the bounds of equity, however.
- Is it better to separate two antagonists or force them to live together?
Equity Will Not Suffer a Wrong Without a Remedy
Two business “partners,” whether coshareholders, LLC members, or operating in partnership form, are like spouses in a marriage. At some point, a large percentage of both unions which began in happiness end in acrimonious divorce. Each “partner” in both has a parental claim to the “baby.” Hence, who retains custody becomes a critical issue. Judges with equitable jurisdiction are asked to exercise their broad discretion with as much flexibility as warranted to fashion an appropriate remedy. Equity’s power to fashion a remedy to fit the circumstances is not limited by the express authority granted to courts in statutes that authorize relief for minority oppression or provide other dissolution authority. The Revised Uniform Limited Liability Company Act explicitly provides that it is supplemented by principles of equity.
Cases from different jurisdictions provide nonexclusive suggestions for remedies and lists of factors to be considered when fashioning relief. Trial judges, sitting through the testimony of credible and disingenuous witnesses, in addition to hearing the spoken words that later appear in the transcript, have the benefit of observing demeanor. The partner who comes off as “reprehensible,” “obdurate,” “imperious,” or "entitled” will not fare well with a dedicated judge striving to do the right thing. Conscious of the trial court’s ability to observe, and guided by the breadth of its equitable discretion, appellate courts approve sensible, but sometimes unusual, orders made below.
In a three-shareholder minority oppression case, the New Jersey Supreme Court upheld the “uncommon remedy” of the minority buying out the majority. In another case, where a father and one son defrauded a second son out of his interest in two corporations they then stripped of all value, the trial court recognized that simply restoring the plaintiff to his interests in the corporations was not a meaningful remedy. The court ordered the defendants to buy out the plaintiff at a value determined as of the date of the complaint when the corporations still possessed their assets. The ruling was upheld even though there was no minority oppression to provide the statutory basis for a buy out. The Missouri Supreme Court upheld the trial court’s exercise of discretion designed to avoid duplication of a plaintiff’s recovery when it affirmed valuation discounts applied in determining fair value and adjustment of the valuation date.
Recently, however, the Mississippi Supreme Court appeared to stretch the bounds of equity. Citing precedent approving the concept that issued stock could be cancelled or redeemed, it upheld the chancellor’s decision to transfer shares from the 51-percent majority shareholder to his 49-percent minority partner to achieve joint control. Dissolution, sought by both parties (at the same time as each sought control), was deemed not feasible because the corporation had only one significant asset: a subcontract from which its revenue derived. Although the possibility of deadlock was acknowledged, the chancellor viewed the equity shift as the only viable remedy to avoid continued oppression.
Whether equity’s authority extends to shifting ownership is one for scholars to debate. A practical question is whether it is better to separate two antagonists or force them to live together. One may speculate that the Mississippi chancellor envisioned joint control as a catalyst to facilitate agreement on a retirement plan for the older partner or one buying out the other. The fact that amicable resolution can be achieved with the aid of good business counsel may have prompted the chancellor to add to his order the unusual directive that the corporation retain a corporate attorney and an accountant.
Compelling warring parties to face reality and resolve their differences is not new. In a dispute between two members of an LLC, the Delaware vice chancellor rendered his opinion, but then afforded the two business partners a time to resolve their differences knowing what the court’s order would be.
Unfortunately, separation is inevitable when either party (or his or her lawyer) is irrational or emotionally invested. Long before actions for minority oppression became common, an erudite New Jersey justice had opined that business divorce seems inevitable when the breakdown in the relationship between the partners is irremediable. The quintessential illustration of this is where the actions and litigiousness of the parties made it clear that their relationship was so intractable and acrimonious as to be toxic, resulting in a majority of the Delaware Supreme Court upholding the appointment of a custodian to sell the company and divide the proceeds.