This week, we take a break from our regular coverage of recent developments in business divorce caselaw in favor of a more enduring, slightly more scholarly debate.  Don your herringbone, affix your spectacles, and retreat to your wood-paneled study.

This post considers whether New York courts should more often treat shareholder oppression in closely held corporations as a wrong capable of being cured, rather than simply a trigger for the corporate death penalty of dissolution.  The Court of Appeals’ definition of shareholder oppression, the concept’s ability to address misconduct often overlooked by traditional fiduciary-duty claims—especially in the closely held business context—and courts’ equitable power to fashion conditional or less drastic remedies all suggest that the answer may be yes.  And some of the recent cases we’ve covered suggest courts are already getting there.

Matter of Kemp Defines Oppression in Terms Larger than Dissolution or BCL 1104-a.

The Court of Appeals in Matter of Kemp & Beatley defined oppression under BCL 1104-a as “majority conduct [that] substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture” (64 NY2d 63, 73 [1984]). 

That flexible, fact-based, reasonable expectations standard sprang from the Court’s thorough consideration of those characteristics of the closely held business that make minority owners uniquely vulnerable.  Focusing on the minority shareholder’s reasonable expectations was necessary because ownership of a closely held business often is intertwined with employment and participation—rights that may not be explicitly protected by contract or traditional fiduciary duties.  And courts should intervene when reasonable expectations are defeated because shareholders in close corporations often lack a reliable (or fair) exit mechanism. 

Those considerations certainly explain why dissolution may be available in an oppression case.  But they don’t explain why dissolution must always be the only meaningful (or, at least the default) remedy. They describe the injury, not just the endpoint.

Put differently, the Kemp Court defines oppression as a wrong perpetrated against reasonable minority shareholders in closely held businesses.  Should an oppressed shareholder need to seek the corporate death penalty—or worse, risk being involuntarily cashed out pursuant to a BCL 1118 election—in order to right that wrong?

Oppression May Rise Where Fiduciary Duties Fall Short.

Kemp’s focus on closely held business produced another side effect: the oppression doctrine often sees what more traditional protections (mostly fiduciary duties) miss.

The fiduciary duty doctrine usually asks whether the majority acted disloyally, diverted value, wasted assets, or otherwise injured the corporation.  Oppression asks a broader question: did the majority use its control to defeat the minority owner’s reasonable expectations in the business?  The latter is broader than the former; not all shareholder oppression is a breach of fiduciary duty. 

Remember Professor Meredith Miller’s work on the oppression doctrine and sex discrimination? In the #MeToo era, Professor Miller explored the oppression doctrine as a potential alternative remedy for owners of closely held businesses who suffer harassment or unfair treatment. 

The existence of that theory proves the point.  Many times, minority shareholders are “wronged,” by exclusion, marginalization, humiliation, or the denial of equal participation in the business.  But many times those same actions fall short of a compelling breach of fiduciary duty claim.

And even where the allegedly oppressive conduct might rise to the level of a breach of fiduciary duty claim, economics often weigh heavily against prosecution of such claims.  You’d be hard-pressed to find a small minority shareholder willing to substantially invest in prosecuting derivative claims where the only recovery flows to the same corporation that oppressed him in the first place.

Oppression is a Uniquely Appropriate Concept in Closely Held (and Family) Businesses.

In addition to those identified in Kemp, there are still more characteristics of closely held businesses that make the oppression doctrine particularly helpful. 

As Peter Mahler wrote just last week, Professor Benjamin Means’ new book, The Principles of Family Business Law, argues that standard business law often fails to accommodate the relational dynamics of family-owned firms—summarized with three principles: intimacy, integration, and inheritance.  In so doing, Professor Means takes a deep dive into all the characteristics that make a family business unique: trust, shared history, handshake understandings, family roles, succession expectations, and years of course-of-dealing.

Those concepts fit naturally with the oppression doctrine and the reasonable expectations standard.  In considering whether the majority defeated the reasonable expectations of the minority shareholder, courts have a pathway to consider most if not all of the things that Professor Means highlights are fundamental to the family business. The same factors that—as argued by Professor Means—often go overlooked when courts focus too much on fiduciary duties and the bargained-for rights in shareholders agreements.

Clever Courts Already Treat Oppression as Remediable Short of Dissolution.

All this is to suggest that in closely held businesses, there’s room for “oppression” claims that do not necessarily beget the corporate death penalty of dissolution.  And perhaps New York Courts already recognize as much. 

For example:

• In Hammad v Jamal Kamal Corp. (post here), Justice Livote found oppressive conduct based on the majority’s reclassification of certain payments to the minority shareholder into loans.  Despite oppression, however, the court declined to dissolve the corporations or order a buyout.  Instead, it ordered money damages: repayment of the financial loss caused by the improper reclassification.    
• Likewise, in Ramirez v Issa (post here), the court faced a BCL 1104-a petition to dissolve the famous Chef’s Table at Brooklyn Fare, but filed after a damages action arising from the same alleged misconduct.  Recognizing not only the common issues of fact and law, but also that the misconduct alleged might be remedied by the damages action, the court stayed the dissolution proceeding in favor of the damages action.
• And in Stile v C-Air Customhouse Brokers-Forwards Inc. (post here), the First Department dismissed dissolution claims based on an anti-dissolution provision in a settlement agreement, but it allowed a minority shareholder oppression claim seeking money damages to proceed, at least to the extent based on the defendants’ alleged refusal to recognize a shareholder.  While Stile hasn’t quite opened the floodgates to non-dissolution claims for shareholder oppression, it seems the First Department at least signaled its potential receptiveness to such claims in the right circumstances.

While decided on different grounds and in different procedural contexts, these cases point in the same direction.  Courts are encountering situations where oppression may be real, but dissolution may be too much. And when they do, they are finding ways—sometimes directly, sometimes indirectly—to separate the wrong from the corporate death penalty.

Oppression Need Not Always Mean Dissolution.

We’ve barely scratched the surface of a complex issue with the benefit of a rich and still-growing body of caselaw.

The oppression doctrine is a powerful and flexible concept, uniquely suited to the realities of closely held businesses. Cabining shareholder oppression solely within the binary question of “to dissolve or not to dissolve” risks converting a broad tool into a too narrow one.

Practically, most oppressed minority shareholders don’t walk into a lawyer’s office saying, “I want to liquidate the corporation.” They complain of being pushed out or cut off. Sometimes dissolution will be the right remedy for that problem. But in some circumstances, dissolution is too blunt an instrument. It may destroy value, trigger a forced buyout, or do little to address the actual misconduct. If courts can identify the defeated expectation with sufficient clarity, they should be willing to tailor the remedy with similar precision.