Shareholder oppression is the unfair treatment of minority shareholders in closely held (small, privately owned) corporations by majority shareholders or those in control of the corporation. In recent years, the doctrine of minority shareholder oppression has expanded to include other types of closely held business entities such as limited liability companies and limited partnerships.
Because a corporation operates under the principle of majority rule, the holders of a majority of shares with voting power often abuse their power to further their own interests and to deny minority shareholders three basic expectations: (1) a lucrative job, (2) a meaningful role in management, and (3) a proportionate share of earnings.
There are two standard definitions of oppression: the “reasonable expectations” test and the “fair dealing” test.
The “reasonable expectations” test for oppression has been defined as “when the majority’s conduct substantially defeats the expectations that objectively viewed were both reasonable under the circumstances and were central to the minority shareholder’s decision to join the venture.” In re Wiedy’s Furniture Clearance Ctr. Co., 487 N.Y.S.2d 901, 903 (N.Y. App. Div. 1985). As discussed in Ritchie v. Rupe, 443 S.W.3d. 856, 901 (Tex. 2014), high courts in Alaska, Iowa, Maryland, Montana, New Jersey, New Mexico, North Carolina, North Dakota, Rhode Island and Washington have adopted the “reasonable expectations” test. See Baur v. Baur Farms, Inc., 832 N.W.2d 663, 674 (Iowa 2013); Boland v. Boland, 31 A.3d 529, 542 (Md. 2011); Scott v. Trans–Sys., Inc., 64 P.3d 1, 6 (Wash. 2003); Hendrick v. Hendrick, 755 A.2d 784, 791 (R.I. 2000); Brenner v. Berkowitz, 634 A.2d 1019, 1028–29 (N.J. 1993); Balvik v. Sylvester, 411 N.W.2d 383, 387 (N.D. 1987); McCauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 237-38 (N.M. 1986); Stefano v. Coppock, 705 P.2d 443, 446 n.3 (Alaska 1985); Meiselman v. Meiselman, 307 S.E.2d 551, 563 (N.C. 1983) (“we hold that a complaining shareholder's ‘rights or interests’ in a close corporation include the ‘reasonable expectations’ the complaining shareholder has in the corporation. These ‘reasonable expectations’ are to be ascertained by examining the entire history of the participants' relationship. That history will include the ‘reasonable expectations’ created at the inception of the participants' relationship; those ‘reasonable expectations’ as altered over time; and the ‘reasonable expectations’ which develop as the participants engage in a course of dealing in conducting the affairs of the corporation.”); Fox v. 7L Bar Ranch Co., 645 P.2d 929, 933 (Mont. 1982). See also O'Neal, F. Hodge, Oppression of Minority Shareholders § 7.15 (2003).
The second definition describes "oppressive conduct" as "burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1020 (N.Y. Sup. Ct. 1984). As further discussed in Ritchie v. Rupe, 443 S.W.3d. 856, 902 (Tex. 2014), high courts in Maine, Mississippi, Oregon, Rhode Island and Washington have adopted the “fair dealing” test. See Napp v. Parks Camp, Ltd., 932 A.2d 531, 538 (Me. 2007); Scott v. Trans–Sys., Inc., 64 P.3d 1, 6 (Wash. 2003); Hendrick v. Hendrick, 755 A.2d 784, 791 (R.I. 2000); Kisner v. Coffey, 418 So.2d 58, 61 (Miss. 1982); Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 393-94 (Or. 1973)(“an abuse of corporate position for private gain at the expense of the stockholders is ‘oppressive’ conduct. [footnote omitted]. Or the plundering of a ‘close’ corporation by the siphoning off of profits by excessive salaries or bonus payments and the operation of the business for the sole benefit of the majority of the stockholders, to the detriment of the minority stockholders, would constitute such ‘oppressive’ conduct …”). See also O'Neal, F. Hodge, Oppression of Minority Shareholders § 7.13 (2003).