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Business Law Update: A discussion on Business Shareholder Oppression.

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims. So I was excited to see a recent Court of Appeals decision on that subject. Check out t2017-02-04-08-16-38-2he February 9, 2017 unpublished decision of Wisner v SB Indiana, LLC, et al

The Wisner case involves two separate parties who claimed an owner/manager, Hardy, violated their rights as members and froze them out of the company.

The first question to ask is, “freeze out from what*?”

                         Control – Decision-making

                         Disclosures of Company Business

                         Profits in the Company

                         Employment in the Company.

What should a business owner/operator do to protect himself/herself?

Well, you have two readily apparent choices – address the issue before the business is formed, or address it once the problem arises.

     1. Addressing the problems before the business starts.

The easiest way is this option: Get an Attorney involved at the onset of the business relationship.

Many of these business disputes in closely held companies could be resolved if, before going into business, the parties openly communicated their expectations, concerns, and clearly articulated in the formation documents (articles of incorporation/organization, Bylaws, shareholder agreement, Operating Agreement) a way out of the business relationship.

This could be the most cost-effective way to ensure to resolve business disputes – address them before they happen – with open communication, and clearly and concisely drafted (and executed!) documents.

       2. Addressing the problems once they occur: Shareholder/Member Oppression Lawsuit.

Michigan law provides a cause of action against the shareholders/member
s who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4404)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:
illegal;
fraudulent;
or willfully unfair and oppressive to the corporation or to the shareholder.” (*in my experience this has been the most often the scenario where these cases arise – from the “freezing out” the minority owners from the business)
“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the corporation.
(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.
(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.
(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.”

Although this Statute applies to closely held corporations, there is also a virtually similar Michigan statute that applies to LLCs.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.
Back to the Wisner Case:
Without getting into the details of the case, there are two points the Court made relating to oppression claims.
a. Is failing to communicate with the minority members oppression?
The Wisner Court looked at the claims made by the minority member – that the manager “cut him off from communication.” The court found that, although Defendant substantially interfered with the minority member’s ability to com
municate…this did not constitute unfair and oppressive conduct.  The court found that “it does not appear that his rights as a member of the LLC provided by MCL 450.4102(q), including any right to receive a distribution, or vote were substantially interfered with by Defendant’s conduct.”
b.  If the Operating Agreement allows activity – that activity cannot be “oppressive”
The court also noted that at the formation of the company the parties had executed an operating agreement to govern their relationship.
The court noted that the oppression statute “had no application if the conduct at issue was authorized by an operating agreement. So to the extent that any of Mr.
Hardy’s actions were authorized by the agreements, then he cannot be found to be willfully unfairly oppressing these members.” Id. Pg 4.
“Likewise the case law has indicated that even a breach of those operating agreements would not be enough to find that he was willfully unfair and oppressive in his conduct.”

Lesson:

Sometimes filing a law suit for Minority Oppression is warranted due to the egregious misconduct of those in control of the company.  However, to constitute “oppression” giving a minority owner relief, such conduct will need to be proven with sufficient facts.

The obvious take away points are two-fold:

1. Get an attorney involved before the business relationship begins and clearly document the
business relationship, especially an exit strategy
. Any conduct the parties agree to in their shareholder/operating agreement cannot be “oppressive”.

2. If you are being frozen out of control in a business – Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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