A recent Northern District New York federal court decision (HT Eric Fryar) caught my eye when I read a passage explaining the court’s reasons for denying a motion to dismiss a plaintiff’s claim against fellow shareholders for breach of fiduciary duty. The court in Rusyniak v. Gensisi, 2009 WL 1269911 at *14 (NDNY May 5, 2009), starts off simply enough, with the observation that the relationship between shareholders in closely held corporations is a fiduciary one. In the next sentence, the court writes:
More specifically, it “is the fiduciary duty owed by . . . majority shareholder[s] in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders.” (Italics added.)
The internal quote is from McCagg v. Schulte Roth & Zabel LLP, 20 Misc 3d 1139(A) (Sup Ct NY County Aug. 1, 2008). Both Rusyniak and McCagg cite the New York Court of Appeals’ seminal decision in Matter of Kemp & Beatley, 64 NY2d 63, 73 (1984), construing the term “oppressive action” as used in the judicial dissolution statute, Section 1104-a of the Business Corporation Law, to mean “majority conduct [that] substantially defeats expectations [of the minority shareholder] that, objectively viewed, were reasonable under the circumstances and were central to the petitioner’s decision to join the venture.”
There are many cases in which courts have found that majority shareholder conduct constituting breach of fiduciary duty — be it self dealing or theft of corporate opportunity or other “classic” violations of the duties of loyalty and care meant to squeeze out the minority shareholder — satisfies the reasonable-expectations test of oppression. But, is the opposite true? Does proof of oppression constitute breach of fiduciary duty, as Rusyniak suggests?
The most common allegation of oppression by minority shareholders involves termination of employment by the controlling shareholders. The Court of Appeals in Matter of Kemp & Beatley noted that obtaining employment is often the main reason for becoming a shareholder in a closely held company that typically pays no shareholder dividends. As I’ve pointed out before, case law holds that the majority’s termination of the minority’s at-will employment does not give rise to a wrongful termination remedy under either a contract or tort theory, but it may be oppressive for purposes of seeking judicial dissolution where the shareholder joined the venture with the reasonable expectation of getting and keeping a job. In other words, the terminated minority shareholder can establish oppression for purposes of BCL 1104-a without the ability to, or needing to, establish breach of fiduciary duty.
Does McCagg support Rusyniak‘s equation of oppression with breach of fiduciary duty? Like Rusyniak, McCagg is not a judicial dissolution case. In pertinent part, McCagg involves a claim against a law firm for aiding and abetting breach of fiduciary duty by the plaintiff’s co-shareholder arising out of an aborted business venture. I regard McCagg‘s statement quoted in Rusyniak (“the fiduciary duty owed by a majority shareholder in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders”) as dicta, mainly for the reason that the court in McCagg found that the alleged misconduct in that case did not involve “oppressive conduct that flows from any hegemonic abuse of [the defendant’s] status as majority shareholder.” I would also point out that the McCagg decision cites no precedent for its statement about a fiduciary duty to avoid oppressive conduct.
Under New York law, oppression is not a free-floating, common law concept. It was created by the legislature in 1979 as part of a new, statutory judicial dissolution remedy against freeze-out and squeeze-out of minority shareholders of closely held corporations. Equating oppression with fiduciary breach may be doing a disservice to both.