| ||Using Selected Tax Principles To Determine Oppressive Conduct In Minority Shareholder Suits|
Sandra K. Miller*
* Assistant professor, Widener University; State University of New York at Stony Brook, B.S., 1976; Hofstra University School of Law, J.D., 1978; American University Graduate School of Business, M.S., 1981; Villanova University School of Law, LL.M., 1990. The author wishes to thank Gina Newman, Departmental Secretary at Widener University. The author appreciates the complimentary services provided by LEXIS/NEXIS.
1 See F. Hodge O’Neal & Robert Thompson, 2 O’Neal’s Close Corporations, §7.21 (3d ed. 1996 & Supp. 1998) (observing that minority shareholders frequently have to resort to litigation to obtain relief for misconduct by the majority shareholders or by corporate action); James D. Cox et al., 2 Corporations, §14.11-14.16 (1998); Sandra K. Miller, Minority Shareholder Oppression in the Private Company in the European Community: A Comparative Analysis of the German, United Kingdom, and French "Close Corporation Problem," 30 Cornell Int’l L.J. 381 (1997) (comparing minority shareholder remedies under German, U.K., and French law); Sandra K. Miller, How Should U.K. and U.S. Minority Shareholder Remedies for Unfairly Prejudicial or Oppressive Conduct Be Reformed?, 36 Am. Bus. L.J. 579 (1999) (discussing remedies for minority shareholder disputes under U.S. and U.K. law and possible reforms).
2 Two empirical studies have been done in America on shareholder disputes in private companies. Several types of allegations repeatedly occur in these cases, including complaints of deadlock, mismanagement, waste, self-dealing, looting, and misapplication of assets. See Harry J. Haynsworth, The Effectiveness of Involuntary Dissolution Suits as a Remedy for Close Corporation Dissension, 35 Clev. St. L. Rev. 25 (1987); see also J.A.C. Hetherington and Michael P. Dooley, Illiquidity and Exploitation: A Proposed Statutory Solution to the Remaining Close Corporation Problem, 63 Va. L. Rev. 1,64-75 (1977).
3 See infra notes 46-52 and accompanying text.
4 See A.W. Chesterton Co. v. Chesterton, 128 F.3d 1,3 (1 st Cir. 1997) (finding breach of fiduciary duty when the minority shareholder sought to transfer his shares to a corporation in an attempt to destroy the corporation’s ability to remain qualified as an S corporation under the federal tax law); Orchard v. Covelli, 590 F. Supp. 1548, 1556 (W.D. Pa. 1984) (indicating that the controlling shareholders owe a duty of loyalty and fairness to the minority shareholders); Hames v. Cravens, 966 S.W.2d 244,246-247 (Ark. 1998) (recognizing individual actions to enforce voting rights, compel dividends, or protect minority shareholders); Seiz Co. v. Seiz, No. 97-1047, 1998 Ark. App. LEXIS 476, at *2-3, 19-20 (Ark. Ct. App. June 17, 1998) (recognizing action for breach of fiduciary duty and doctrine of oppression of minority shareholders but denying recovery where the plaintiff’s father had verbally promised the plaintiff control of the family business but instead left 60% of the stock to his daughter); Zimmerman v. Bogoff, 524 N.E.2d 849, 853-54 (Mass. 1988) (holding that a 50% shareholder breached his fiduciary duty to the other 50% shareholder by diverting income from the jointly-owned enterprise to a corporation owned solely by the defendant); Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 663 (Mass 1976) (holding that the majority shareholders failed to show a legitimate business purpose for severing the plaintiff from the payroll and had breached their fiduciary duty); Crosby v. Beam, 548 N.E.2d 217, 221 (Ohio 1989) (recognizing a direct action for breach of fiduciary duty when minority shareholders alleged that the majority had used its control to the majority’s own advantage and had deprived the minority of an equal opportunity to benefit, without a legitimate business purpose); Schwartz v. Rice, No. 96-CA0348, 1997 Ohio App. LEXIS 3345, at *12-13, 17-18 (Ohio Ct. App. May 19, 1997) (recognizing that a plaintiff may recover in a direct action for breach of fiduciary duty when the shareholder’s injury is separate and distinct from the injury to the corporation); Blake v. Faulkner, No. 17-95-12, 17-95-13, 1996 Ohio App. LEXIS 5288, at*10-12 (Ohio Ct. App. Nov. 6, 1996) (denying recovery for breach of fiduciary duty when the plaintiff was a lawyer and challenged the compensation plan adopted by the corporation). But see Bernard v. Buttner, No. CV95 032 30 62, 1995 Conn. Super, LEXIS 3048, at *9 (Conn. Super. Ct. Oct. 30, 1995) (denying relief to plaintiff for breach of fiduciary duty, indicating that plaintiff had failed to demonstrate that New York law recognizes an independent duty owing to shareholders to pay reasonable dividends or prevent waste).
5 A.W. Chesterton Co., 128 F.3d at 3-5; Smith v. Atlantic Properties Inc., 422 N.E.2d 798, 800-01 (Mass App. App. Ct. 1981); see also Brenner v. Berkowitz, 634 A.2d 1019, 1021, 1023 (N.J. 1993) (noting failure to issue W2s or 1099s to some employees who had earned more than $600, to pay sales tax, and to record cash purchases of merchandise by employees in a suit by the minority shareholder seeking dissolution of the corporation, a buy-out pursuant to New Jersey statute, or other relief).
6 See, e.g., Brenner, 634 A.2d at 1021; Wessin v. Archives, 581 N.W.2d 380,382 (Minn. App. Ct. 1998); Kelley v. Axelsson, 687 A.2d 268, 270 (N.J. Super. Ct. App. Div. 1997) (involving suit for corporate dissolution by passive minority shareholders alleging that the majority failed to record financial transactions and lacked the most basic internal controls).
7 See, e.g., Bernard, 1995 Conn. Super. LEXIS 3048, at *2; Barth v. Barth, 659 N.E.2d 559, 560 (Ind. 1995); Wessin, 581 N.W.2d at 382; Jorgensen v. Water Works, Inc., 582 N.W.2d 98, 100-01, 105 (Wis. Ct. App. 1998).
8 See, e.g., Bonavita v. Corbo & Corbo Jewlers, Inc., 692 A.2d 119, 121, 130 (N.J. Super. Ct. Ch. Div. 1996) (ordering shareholder buy-out where minority shareholder’s widow was a passive investor in the company and failed to receive dividends); In re Smith 546 N.Y.S.2d 383, 383-84 (N.Y. App. Div. 1989) (involving a suit for dissolution alleging that the majority failed to pay dividends, although the court indicated that the petitioner’s reasonable expectations of receiving dividends could not have been frustrated because the company had never paid dividends).
9 See, e.g., Kelley v. Axelsson, 687 A.2d at 270; In re Farega Realty, 517 N.Y.S.2d 610, 610-11 (N.Y. App Div. 1987) (seeking dissolution where defendant failed to keep proper records); White v. Perkins, 189 S.E.2d 315, 320 (Va. 1972) (holding that the defendant should keep better accounts).
10 See, e.g., Sax v. Worldwide Press Inc., 809 F.2d 610, 612 (9 th Cir. 1986) (involving allegations that the majority kept inadequate records of inventory, and structured sales between the corporation and another corporation controlled solely by the majority shareholders at less than fair market value); Orchard, 590 F. Supp. at 1553-54; Kirk v. First Nat’l Bank of Columbus, 439 F. Supp. 1141, 1143-44 (D. Ga. 1977) (alleging breach of fiduciary duty and Rule 10b-5 and strong possibility of federal tax liability by plaintiffs who sold stock to the majority stock holder for 75% of book value and subsequently discovered that the majority shareholder had pocketed $2.5 million from the sale of used construction equipment); Forrest v. Baeza, 67 Cal. Rptr. 2d 857, 859-60 (Cal. Ct. App. 1997) (cross-complaint that the majority shareholders made personal use of assets and funds of the corporations, and transferred assets and funds of the corporations to themselves without adequate compensation to the corporation); Zimmerman, 524 N.E.2d at 853; Crosby v. Beam, 548 N.E.2d 217, 222 (Ohio 1989); Orchard v. Covelli, 590 F. Supp. 1548, 1554 (W.D. Pa. 1984). But see In re Breiterman, 580 N.Y.S.2d 463, 464-65 (N.Y. App. Div. 1992) (refusing to grant dissolution when there was insufficient evidence to suggest systematic looting of the company because there was only one instance of failure to properly apportion closing expenses of a sale).
11 See infra notes 59-62 and accompanying text.
12 See infra notes 88-113 and accompanying text; see also infra Part II.B.2-5.
13 See Infra notes 63-72 and accompanying text.
14 See infra Part II.B.6.
15 See Hunter J. Brownlee, The Shareholder’s Agreement: A Contractual Alternative To Oppressions As A Ground For Dissolution, 24 Stetson. L. Rev. 267 (1994) (emphasizing the benefit of using a shareholder’s agreement to address issues that could cause friction and potential shareholder litigation).
16 See Brenner v. Berkowitz, 634 A.2d 1019, 1028-29 (N.J. 1993).