State laws give voting power and, hence, management control, to majority shareholders in closely-held corporations. The minority shareholder can thus find herself without an effective voice in setting corporate policies for officer and employee compensation, finance, accounting, shareholder distributions, and a host of other decisions affecting the business. When this happens, the minority shareholder who feels she is being treated unfairly may desire to cash out her shares–for which no market likely exists–whether or not she has an available mechanism to do so, such as put rights or a buy-sell agreement.
Most states, including New York, long ago enacted judicial remedies for minority shareholders in cases of “oppressive” conduct by controlling shareholders. The New York statutory scheme, codified in §§ 1104-a and 1118 of the Business Corporation Law, authorizes the court to dissolve a closely-held corporation while giving the controlling shareholders the option to avoid dissolution by purchasing the petitioning owner’s shares for “fair value” which the court will determine if the parties cannot agree on a price. Many states including New York, by statute or common law, empower the court to compel a buy-out of the petitioner’s shares even if the controlling shareholder does not elect to purchase.
Delaware–which ranks 45th among the states in population but #1 in the incorporation of out-of-state entities–is not one of those states. Delaware, known for its management-friendly business laws, does not have a statute protecting oppressed minority shareholders of closely-held corporations. Except in cases of deadlock between two 50/50 shareholders, Delaware does not have a statute authorizing judicial dissolution of a closely-held corporation at the behest of a shareholder. Neither Delaware statute nor case law recognizes an oppressed minority shareholder’s right to be bought out.
The disadvantage of being a minority shareholder in a Delaware closely-held corporation came to the fore last week in Blaustein v. Lord Baltimore Capital Corp., C.A. No. 6685-VCN (Del Ch Apr. 30, 2013), in which Vice Chancellor Noble of the Delaware Chancery Court issued a 49-page opinion holding:
- the alleged failure by the controlling directors and shareholders to “negotiate in good faith toward a reasonable purchase price” did not breach any implied covenant of good faith and fair dealing arising from a provision in the shareholders’ agreement fixing minimum voting thresholds for board and shareholder approval for discretionary stock redemption, and
- the defendant controlling directors and shareholders owed no fiduciary duty to the plaintiff as a minority shareholder to accept her “reasonable” repurchase proposal. Continue Reading