“Capital punishment for the corporation.” That’s how the Maryland Court of Appeals — that state’s highest court — in Bontempo v Lares, 444 Md. 344 , recently referred to the remedy of judicial dissolution made available by statute in most states, including New York, to oppressed minority shareholders of closely held corporations.
I would not go so far as to suggest that our corporate jurisprudence is experiencing something akin to the growing anti-death penalty movement in our criminal jurisprudence, but the thoughtful majority opinion for the Maryland high court in Bontempo marks a heightened regard for the diverse interests at stake when considering an appropriate remedy for oppressive conduct by those in control of the corporation, and highlights the breadth of less drastic, alternative remedies available to trial courts.
Bontempo also merits attention at a more granular level for its discussion of the interplay and distinction between remedies available to an oppressed minority shareholder qua shareholder versus qua fired employee.
The case involves a Maryland corporation named Quotient, Inc. formed in 1999 by respondents Clark Lare and his wife Jodi to recruit information technology professionals for placement as consultants at government agencies and private employers. The following year, the petitioner David Bontempo joined the business in a “handshake deal” as a 45% shareholder responsible for sales and business development. Bontempo was made an officer and director but had no employment agreement.
In 2001, Bontempo formally subscribed to a pre-existing Stockholders Agreement between the Lares which included a provision requiring any shareholder whose employment was terminated “for good cause” to sell his or her shares to the corporation or to the remaining shareholders. The same provision was included in a 2004 Amended and Restated Stockholders Agreement.
Quotient’s business grew and prospered due in large part to its success in obtaining federal government contracts. However, over a period of years the relationship between Bontempo and Clark Lare soured over money, hiring, and other issues, leading Lare to cut Bontempo’s salary in 2009. In March 2010, after failing to reach terms on a negotiated buyout of Bontempo’s shares, Lare fired Bontempo, later claiming that he did so for cause based on Bontempo’s poor job performance.
The Lower Court Proceedings
Bontempo filed suit soon afterward under Maryland Code, Corporations & Associations § 3-413 which, like § 1104-a of New York’s Business Corporation Law, authorizes a minority shareholder of a close corporation to petition for judicial dissolution on grounds of “illegal, oppressive, or fraudulent” acts by the directors or those in control of the corporation. Bontempo’s complaint also asserted a direct claim against Quotient seeking damages for unpaid salary and distributions based on his status as both an employee and a shareholder. His complaint also asserted derivative claims against the Lares for breach of fiduciary duty and diversion of corporate funds for personal purposes. The Lares counterclaimed for a judgment declaring that Bontempo had been fired for good cause and thus was required to sell his stock to the company.
After a nine-day bench trial the trial judge ruled in Bontempo’s favor on his oppression claim, finding that he had a reasonable expectation of employment and participating in profit distributions and that he would not be terminated for subjective reasons. The trial court specifically found that Lare oppressed Bontempo by firing him for refusing to sell his shares.
The court nonetheless declined to order the drastic remedy of dissolution or to reinstate Bontempo’s employment, noting that the company’s business was “thriving” and that a lesser, more appropriate remedy was to order an accounting of the Lares’ personal use of Quotient funds for non-business purposes, together with an award of a portion of Bontempo’s legal fees and $118,000 in unpaid distributions. The court also denied Bontempo relief on his claim for unpaid salary, finding that at all times he was an at-will employee of the corporation. Finally, the trial court dismissed the Lares’ counterclaim seeking to compel a stock sale, finding unsupported their contention that Bontempo had been fired for good cause.
Both sides appealed to the Maryland intermediate appellate court which affirmed all but one of the trial court’s challenged rulings (read here).
The Court of Appeals’ Ruling
The primary issue raised by Bontempo in his subsequent appeal to the Maryland high court was whether the lower courts erred by failing to order employment-related relief — e.g., reinstatement with an award of back pay and a salary into the future — as part of the relief for Lares’ oppressive conduct. In affirming the lower courts’ rulings, the Court of Appeals therefore discussed not only the at-will employment doctrine under Maryland law, but also the basis for finding oppression and the appropriate remedy once oppression is established.
Under Maryland common law, as in New York, there is a strong presumption that an employment relationship is at-will unless the parties contract otherwise by specifying a clear duration of employment or by spelling out reasons for termination, such as just cause. The Court of Appeals rejected Bontempo’s argument that, as the court put it, essentially “leverage[d] the court’s assessment of his expectations [of continued employment] for purposes of the dissolution remedy into an employment-related remedy for a non-existent employment contract.” As the court further explained:
A “reasonable expectation” for purposes of the corporate dissolution statute is simply a way of detecting oppression, but it does not dictate the relief that an equity court is to grant. While Mr. Bontempo may have had a reasonable expectation of a future relationship with Quotient that included a connection to the corporation as an employee, officer, director, and shareholder, that is a far cry from an employment agreement that entitles him to a specific employment-related relief – i.e., a specific position within the company with specific duties, pay, and conditions of employment. One might envision a situation in which a minority shareholder reasonably believed, upon committing capital to an entity, that one day he would advance to an executive position with the enterprise and in which, as a result of oppressive conduct of the majority shareholder, the minority shareholder has never been considered for any management position. A court acting under the authority of the corporate dissolution statute would be venturing far afield to order the company to hire the shareholder into a particular position with particular duties at a specified salary.
The high court also rejected Bontempo’s argument that employment-related relief would be “equitable” because the Stockholders Agreement required a shareholder-employee terminated for good cause to sell his or her shares back to the company. Here’s what the court said in that regard:
[T]he reference to a “for cause” termination in a forced sale provision of the [Stockholders Agreement] is quite different from an employment agreement. When an owner-employee’s job with the company is terminated for cause, it indicates such a rift among those in control of the company that a forced buy-out would likely be necessary to oust the terminated employee of his shares and preserve the ability of the corporation to operate. The fact that a buy-out is mandated when one of the owner-employees is terminated for cause does not imply that an owner-employee may only be terminated for cause. It does mean that the forced buy-out is not triggered if the owner-employee is not terminated for cause. In this case, in ruling on Quotient’s counterclaim, the Circuit Court found that he was not terminated for cause and, accordingly, he was not required to sell his shares.
Were the lesser, monetary remedies for oppression granted Bontempo adequate? The two dissenting judges thought not, among other reasons, because they did not provide Bontempo protection going forward against the Lares’ “continuing to funnel corporate earnings to their personal benefit.”
Bontempo’s seemingly single-minded pursuit of employment-related remedies including reinstatement, and his opposition to a compelled buy-out under the Stockholders Agreement, may have dissuaded him from seeking an all-out dissolution remedy as well as the more typical alternative remedy to dissolution, namely, a mandatory buy-out of the petitioner’s shares for fair value. The Court of Appeals’ opinion saw fit nonetheless to comment on the range of interests — not just those of the oppressed shareholder — to be taken into account when devising an equitable remedy:
A court acting under [the oppressed shareholder statute] to fashion a remedy less drastic than dissolution is not required to match its remedy to an expectation of the minority shareholder. (Indeed, the default remedy – dissolution – may bear no correlation to any expectation of a shareholder.) In particular, a court should take into account not only the reasonable expectations of the oppressed minority shareholder, but also the expectations and interests of others associated with the company. Inherent in the notion that a court of equity may devise a remedy other than the statutory remedy invoked by the minority shareholder is that there are other interests at stake besides those of the oppressed or disaffected shareholder. The existence and operation of the corporation – an entity that is legally distinct from any of its owners – affects not only the complaining and controlling shareholders, but also many others who may be associated with or depend on the company – other shareholders, its management, employees, and customers. Dissolution – capital punishment for the corporation – affects those parties as well.
Finally, any discussion of Bontempo would be incomplete without mentioning the “non-exhaustive” list of “alternatives to dissolution that might be appropriate in a particular case” — including a buy-out for fair value — drawn from a 1973 decision by the Oregon Supreme Court in Baker v Commercial Body Builders, Inc.:
(a) The entry of an order requiring dissolution of the corporation at a specified future date, to become effective only in the event that the stockholders fail to resolve their differences prior to that date;
(b) The appointment of a receiver, not for the purposes of dissolution, but to continue the operation of the corporation for the benefit of all the stockholders, both majority and minority, until differences are resolved or “oppressive” conduct ceases;
(c) The appointment of a “special fiscal agent” to report to the court relating to the continued operation of the corporation, as a protection to its minority stockholders, and the retention of jurisdiction of the case by the court for that purpose;
(d) The retention of jurisdiction of the case by the court for the protection of the minority stockholders without appointment of a receiver or “special fiscal agent”;
(e) The ordering of an accounting by the majority in control of the corporation for funds alleged to have been misappropriated;
(f) The issuance of an injunction to prohibit continuing acts of “oppressive” conduct and which may include the reduction of salaries or bonus payments found to be unjustified or excessive;
(g) The ordering of affirmative relief by the required declaration of a dividend or a reduction and distribution of capital;
(h) The ordering of affirmative relief by the entry of an order requiring the corporation or a majority of its stockholders to purchase the stock of the minority stockholders at a price to be determined according to a specified formula or at a price determined by the court to be a fair and reasonable price;
(i) The ordering of affirmative relief by the entry of an order permitting minority stockholders to purchase additional stock under conditions specified by the court;
(j) An award of damages to minority stockholders as compensation for any injury suffered by them as the result of “oppressive” conduct by the majority in control of the corporation.