A Simple Statutory Solution to Minority Oppression in the Closely Held Business

By John H. Matheson & R. Kevin Maler. Full text here.

Disputes involving closely held businesses come in primarily two varieties. When, as is often the case, the business fails, creditors regularly seek to pierce the corporate veil in an attempt to reach the assets of the business owners. When the business succeeds, on the other hand, those in control often are accused of keeping a disproportionate slice of the profit pie and of squeezing or freezing out minority owners. These latter disputes are often discussed under the rubric of minority shareholder oppression, and attempts to deal with them by either statute or judicial decision are as old as corporate law. Moreover, these disputes are not unique to businesses in the United States but are part of the global fabric of business organization law.

Virtually every state recognizes that minority shareholders in closely held corporations are much more vulnerable than their larger entity counterparts. Unfortunately, each state differs in its approach, a surprising state of affairs for such an important area of corporate law. This diversity is magnified by the growth of the limited liability company—that is, the “oppression” problem involves all closely held businesses, not just corporations. Any solution should be applicable across all business entities.

The authors argue for a statutory solution to minority oppression by proposing a model statute that creates a buyout right for both the shareholder and the company. Unlike traditional remedies, the proposed buyout right does not depend on a showing of wrongdoing. Consequently, the statute provides liquidity to the minority shareholder without the wasteful and acrimonious litigation presently attendant to the resolution of such disputes.

The authors also perform an independent and exhaustive analysis of minority oppression statutes and related case law to determine the underlying circumstances and the nature of relief. The results of the authors’ fifty-state analysis are summarized in an Appendix. For each state, the authors report the type of statute, the standard of liability, whether a buyout is permitted, and the context of the buyout remedy.