Douglas K. Moll is Professor of Law at the University of Houston Law Center, where he teaches corporate and commercial law, and is one of the nation’s leading authorities on shareholder oppression in the closely held business entity. His scholarly writings on the subject have been cited in numerous cases including, in New York, Horning v. Horning Construction LLC, 12 Misc 3d 402 (Sup Ct Monroe County 2006), in which the court relied on Professor Moll’s analysis of the impact of the 1999 amendments to the LLC Law on relations between minority and majority members of LLCs.
I’ve had an occasional correspondence with Professor Moll for a number of years, so when I heard that he and co-author Robert Ragazzo had published a new treatise called The Law of Closely Held Corporations (Aspen Publishing 2009), I figured it would be a great opportunity to pose some questions about his views on shareholder oppression and about his new book. I think you’ll find his answers interesting.
Mahler: Professor, how did you get interested in problems of the close corporation and shareholder oppression?
Moll: I practiced at Fulbright & Jaworski in Houston before becoming a law professor. While I was at Fulbright, I worked on several close corporation disputes, including the appeal of a shareholder oppression judgment. I read the briefs and the allegations of “shareholder oppression” and I couldn’t understand the operation of such a doctrine. What happened to the business judgment rule? What happened to employment at will? The area fascinated me and I read every court decision and secondary source that I could get my hands on. That has basically continued for the past fifteen years. I have now written multiple articles on the closely held corporation and the shareholder oppression doctrine; a casebook on closely held businesses, including close corporations; a second casebook on business organizations generally; and a just-published treatise on the law of closely held corporations.
Mahler: Some argue that courts shouldn’t give minority shareholders protection they didn’t see fit to bargain for when they became shareholders. Your reaction?
Moll: Well, first of all, there are a host of minority shareholders who have no opportunity to bargain before they become shareholders (e.g., shareholders who receive their stock via gift, inheritance, or in a divorce settlement). So denying these shareholders protection for their lack of bargaining doesn’t make sense to me. Second, there are many impediments to effective contracting that make such a position untenable in my mind. A few examples: (1) Because close corporation owners are frequently linked by family or other personal relationships, there is often an initial atmosphere of mutual trust that diminishes the sense that contractual protection is needed. (2) Even if an investor did recognize that planning for dissension was useful, barriers to effective contracting would still exist. In light of the countless ways in which oppressive conduct can occur, it is quite difficult to foresee all (if not most) of the situations that may require contractual protection. This inability to appreciate the universe of potential problems may result in incomplete contracting or, possibly, in no contracting at all. (3) Ex ante contracting is expensive, as it often requires the assistance of an attorney. In fact, effective ex ante contracting may require the services of multiple attorneys — one (or more) representing the majority’s interests, and one (or more) representing the minority’s interests. This level of expense may be prohibitive for many small businesses, especially at their inception. I discuss these and other arguments in the treatise referenced above, as well as in an article that I wrote in the Wake Forest Law Review.
Mahler: In Delaware, unless the corporation elects to file as a statutory close corporation, there seems to be little or no remedy for the oppressed minority shareholder. Do you think it’s a case of neglect or deliberate policy choice by the Delaware legislature, and do you see it ever changing?
Moll: Even if one elects to file as a statutory close corporation, what is the ex post judicial remedy? There isn’t one. Subchapter XIV of the Delaware General Corporation Law allows parties to contract for protection in advance, but if the parties do not, there is no provision providing for court-ordered dissolution for example. I do think this is a deliberate policy choice by the Delaware legislature, but I don’t think it is due to a hostility toward minority shareholders. I believe the Delaware legislature simply believes that their existing fiduciary duty doctrines and other provisions allowing for contractual protections are sufficient. In a sense, they are right. For example, many oppression lawsuits involve disguised dividend payments to the controlling shareholder or other violations of traditional shareholder rights. Those claims, in my view, are all actionable under Delaware law. They won’t be called “oppression” claims, but they will work as fiduciary duty, illegal dividend, conversion, or similar claims. What may be different about Delaware law is that they do not seem to offer protection to “non-traditional” shareholder rights – such as a right to employment or an active management role in a close corporation – absent a contractual right providing for such. In other states with oppression doctrines, those non-traditional shareholder rights can be protected even in the absence of a contract. It is also not clear whether Delaware would allow for a buyout as a remedy. It is hard to know if this will ever change. It would be interesting to see what Delaware would do with a classic freeze-out dispute in a close corporation, a la Wilkes v. Springside Nursing Home out of Massachusetts. A case like that would really test whether Delaware is serious about not providing special common-law protections for close corporation shareholders.
Mahler: Over the last decade LLCs have become the preferred form of new business entity filings in most states. Are minority members of LLC any more or less prone to majority abuse than minority shareholders of close corporations, and does LLC legislation adequately deal with the issue?
Moll: In my opinion, minority members of LLCs are just as prone to majority abuse as their close corporation brethren. The lack of a market exit and the same principles of majority rule set the stage for possible abuse. Several states provide a dissolution-for-oppression statute in the LLC setting, but such statutes are not as prevalent as they are in the corporation context. Some argue that LLC owners will be more likely to contract for protection because LLC statutes contain far fewer default rules than comparable corporate statutes. The fact that owners may need to contract for governance rules, however, does not mean that they will also contract for protections from abusive majority conduct – a problem that they may not even foresee. I have written somewhat extensively on this LLC and oppression issue in a 2005 Wake Forest Law Review article.
Mahler: You also published an article in the Duke Law Journal weighing the arguments for and against marketability and minority discounts in fair value proceedings tiriggered by oppression lawsuits. Where do you come out on the question?
Moll: This is a hard one to answer succinctly. (In fact, it took me on the order of 80-90 pages in the Duke article that you mention). I’ll just jump to the conclusion: I do not believe that discounts are appropriate in an oppression buyout. Discounts are discussed in great detail in the treatise referred to above as well as in the Duke Law Journal article that you mention.
Mahler: You and your co-author, Robert Ragazzo, have just completed a new treatise called The Law of Closely Held Corporations. Why did you write it, and who did you write it for?
Moll: We wrote the treatise because we have been researching, writing, and teaching about close corporations for years, and we have both served frequently as consulting and testifying experts in close corporation disputes (and disputes involving business organizations generally). Although there are some helpful resources out there, we found that a number of recurring and difficult issues are not adequately addressed by existing treatises, and some of those publications have become dated. We decided, therefore, to write a comprehensive and up-to-date treatise for practicing lawyers that would deal with the recurring problems that arise in close corporations and, more importantly, would provide answers and guidance for many of those problems. Plus, we thought it would be fun. After all, what could be more fun than spending two years writing a treatise? Hmmm.
Mahler: Lawyers who form private entities involving multiple owners don’t always appreciate the problems that can occur down the road. How does your book help them?
Moll: I am obviously biased, but I believe that the treatise covers all of the major litigation and transactional issues related to the closely held corporation. The treatise discusses the common (and not-so-common) problems that can and often do occur down the road. Perhaps more importantly, the treatise discusses ways to avoid or mitigate those problems. Different jurisdictional approaches to major issues are covered (some in 50-state chart form), and a set of forms is also provided. We attempted to make the materials comprehensive and up-to-date, and it is our hope that practicing lawyers will find them to be useful.
Mahler: Does the book have a section on oppression and other bases for dissolution?
Moll: Yes. One of the largest chapters in the treatise is on oppression. There is another chapter on remedies for oppression and other forms of dissension. There is also a section on deadlock.
Mahler: How about variations in state laws governing closely held business entities — does your book address them?
Moll: It does. As I mentioned above, we have several 50-state charts on some major issues. Even where there is not a chart, our goal was to provide authority for all of the major jurisdictional approaches to a problem or issue. To this end, the footnotes are extensive and there are references to multiple jurisdictions. The treatise, simply put, is intended to be national in scope.
Mahler: Thanks for taking the time Professor, and I look forward to reading the treatise.