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Chapter 30 Oppression in CHC. Nature of dissension / oppression Freeze out techniques Traditional corporate rules Fiduciary duties Equal opportunity Court balancing Traditional duties (BJR) Oppression statutes Reasonable expectations Whose expectations? and when? - PowerPoint PPT Presentation
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Corporations:A Contemporary Approach
Chapter 16Public Shareholder Activism
Slide 1of 65 Nicolas Delille, “Oppression” (2013)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
Slide 2of 36
Chapter 30Oppression in CHC
• Nature of dissension / oppression– Freeze out techniques– Traditional corporate rules
• Fiduciary duties– Equal opportunity– Court balancing– Traditional duties (BJR)
• Oppression statutes– Reasonable expectations– Whose expectations? and when?– Remedy: buyout or dissolution– Meaning of “fair value”
• Oppression in LLC: corporate or contract?
Module X – Close Corporations
Citizen of world
Law profession
Corporate practice
Bar exam
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
Slide 3of 36
Close Corporations
What if agreement -- • deviates from model? • does not comply with statute? • is unfair? • is incomplete (no liquidity)?
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Compare models
Corporate Model Majority control Dividends (BJR) Liquid - sell into market
Partnership Model Equal rights Share profits (accounting) Dissolve (liquidate)
Close Corporation
Minorityshareholder
Majorityshareholders
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
Slide 5of 36
Freeze-out
How can majority• take advantage of minority?• get rid of minority?
Close Corporation
Minorityshareholder
Majorityshareholders
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Two freeze-outs …(two results)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Freeze-outs
Close Corporation
Minorityshareholder
Majorityshareholders
Wilkes v. Springside Nursing Home (Mass 1976)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Wilkes v. Springside Nursing Home (Mass 1976) "... when stockholders in a close corporation
bring suit against the majority alleging a breach of the strict good faith duty ... it must be asked whether the controlling group can demonstrate a legitimate business purpose for its action .... the controlling group ... must have some room to maneuver in establishing the business policy of the corporation ..."
"When an asserted business purpose for their action is advanced by the majority, .... we think it open to minority to demonstrate that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority's interest
".. our courts must weigh the legitimate business purpose, if any, against the practicality of a less harmful alternative...."
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
Slide 9of 36
Freeze-outs
Close Corporation
Minorityshareholder
Majorityshareholders
Nixon v. Blackwell (Del 1993)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Nixon v. Blackwell (Del 1993)
"... stockholders need not always be treated equally for all purposes ... To say that fiduciary principles require equal treatment is to beg the question whether investors would contract for equal or even equivalent treatment ....."
"... the minority stockholders were not (a) employees of the Corporation, (b) entitled to share in the ESOP, (c) qualified for key man insurance, or (d) protected by specific provisions in a stockholders' agreement.
"The directors' actions following Mr. Barton's death are consistent with his plan. An ESOP is normally established for employees"
What does “entire fairness”
apply to?
Corporations:A Contemporary Approach
Slide 11of 59
1. In a partnership, a partner who wants out:a. Can withdraw and get pro rata
cashb. Must get partners’ approvalc. Must have agreement to be
paid for ownership interest
2. In a CHC, a shareholder who wants out:a. Can withdraw and get pro rata
cash for sharesb. Must have buyout Kc. Is stuck
3. In CHC in MA, a mistreated minority Sh…a. Gets judicial balancing b. Gets buyout optionc. Gets only BJR
4. In a CHC in MA, a minority sh excluded from share tx…a. Gets equal treatmentb. Must show unfairnessc. Gets only BJR
5. In CHC in DE, minority sh…a. Gets equal treatment if majority
deals in sharesb. Gets judicial balancingc. Gets BJR
6. In a CHC, minority Shs…a. Should get p-ship rightsb. Should get only corporate rightsc. Should get hybrid rights, given
lack of liquidity
Answers:
Chapter 30Oppression in CHC
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
Slide 12of 36
What “liquidity” rule for CHC?
Sam incorporates a family business. Eventually he retires and gives equal shares to his two daughters – Anna and Bertha.
Bertha wants to move to the big city. Can she get her money?
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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PartnershipAny shareholder can
withdraw and demand payment of her fair share.
• Heatherington & Dooley: mandatory buyout right (no opt-out).
• Create market for full CHC stock by legislative fiat.
Modified Any shareholder who
is denied her reasonable expectations can withdraw and get paid.
• Need not formalize understanding
• Close corporation = incorporated partnership!!
Corporation No easy out / only
majority can set dividends or get $$ on withdrawal.
• No partner-like rights unless negotiated.
• “Corporation is corporation is corporation.”
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Enter legislature (stage left) …
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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MBCA § 14.30 Grounds for judicial dissolution.
The [court] may dissolve a corporation:
(2) In a proceeding by a shareholder if it is established that
(ii) the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive or fraudulent ...
Noscitur a sociis
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Meaning of “Oppression”
Minority Perspective Role control / financial “Expectations”
Change over time
Majority Perspective Control prerogatives Clarity of “deal”
“Harsh, bad faith”
Close Corporation
Minorityshareholder
Majorityshareholders
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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In re Kemp & Beatley (NY 1984)
Chief Judge Cooke:
"A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.“
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Distinguish
In re Kemp & Beatley (NY 1984)• Long-time Eees (regular “bonuses”)• Longtime mgmt / financial rights• Remedy: buyout
Bonavita v. Carbo (NJ Super 1996)• Widow of retired Eee (family member)• No mgmt / limited financial rights• Remedy: buyout
Nixon v. Blackwell (Del 1993)• Non-Eee family members• Structural limits on liquidity rights• Remedy: none
Prof. Doug Moll, University of Houston
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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NC approach …
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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NC Bus Corp Act § 55-14-30 Grounds for judicial dissolution.
The superior court may dissolve a corporation:
(2) In a proceeding by a shareholder if it is established that
(ii) liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder; ...
Meiselman v. Meiselman(NC 1982)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Remedies …
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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In re Kemp & Beatley (NY 1984)
Chief Judge Cooke:
"A court has broad latitude in fashioning alternative relief, but when .... there has been a complete deterioration of relations between the parties, a court should not hesitate to order dissolution.
"Every order of dissolution, however, must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder's stock at fair value. See NY BCL § 1118(a)."
Francisco GoyaTres de Mayo (1814)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Brodie v. Jordan (Mass 2006)
“The defendants interfered with the plaintiff’s reasonable expectations by excluding her from decision-making, denying her access to company information, hindering her ability to sell her shares. The defendants were the only ones receiving any financial benefit from the corporation.
“The remedy should neither grant the minority a windfall nor excessively penalize the majority. [Buyout ordered by trial court] placed the plaintiff in a significant better position than she would have enjoyed absent the wrongdoing. Money damages will be the appropriate remedy.
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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“Oppression” cases
1960-76 1984-85 1990-2000
No relief 27 (50.0%) 4 (10.8%) 55 (36.9%)
Dissolution order 16 (29.6%) 10 (27.0%) 42 (28.2%)
Buyout order 3 ( 5.6%) 20 (54.1%) 42 (28.2%)
Other relief 8 (14.8%) 3 ( 8.1%) 10 (6.7%)
TOTAL 54 (100%) 37 (100%) 149 (100%)
Cases/year 3.4 18.5 13.5
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Meaning of “fair value” …
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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MBCA § 14.34 Election to Purchase in Lieu of Dissolution
(a) In a proceeding under 14.30(2) to dissolve a [close corporation] ... the corporation may elect or ... one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares.
(b) An election to purchase ... may be filed with the court at any time within 90 days after the filing of the petition under 14.30(2) ....
(d) If the parties are unable to reach an agreement [as to fair value within 60 days after the election], the court ... shall determine fair value ...
(e) ... the court shall enter an order directing the purchase ... as the court deems appropriate, which may include payment of the purchase price in installments ... and any additional costs, fees, and expenses as may have been awarded ...
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Hypothetical
Remember Justin (40%), Kathy (40%) and Lorenzo (20%). Kathy and Lorenzo kick Justin out. He petitions for involuntary dissolution.
Kathy and Lorenzo then ask the court for a a buyout order. After a failed negotiation, the court must fix “fair value”.
What is “fair value” of minority shares?• Pro rata value of “going concern” enterprise value?• Subject to discounts?
– “lack of control”– “lack of marketability”
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Enterprisevalue (100%) $10.0
Corporations:A Contemporary Approach
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Enterprisevalue (100%)
$4.0 Pro rata value (40%)
Corporations:A Contemporary Approach
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Enterprisevalue (100%)
$2.8Pro rata
value (40%)
Lack ofcontrol
(30% discount)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Enterprisevalue (100%)
$1.6
Pro rata value (40%)
Lack ofcontrol
(30% discount)
Lack ofmarketability (30% discount)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Minority shares• “Fair market value”• “Fair value”
Enterprisevalue
Pro rata value
Control discount
Marketabilitydiscount
Corporations:A Contemporary Approach
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1. In a CHC, a minority Shs can seek involuntary dissolution:a. When shareholders fail to elect
a new boardb. When directors disagree on
business policyc. When control Shs are
oppressive
2. In a CHC, a minority Sh who has a lousy buyout contract:a. Can petition for dissolution if
terms are unfairb. Is stuck with contract
3. In CHC, involuntary dissolution will be granted …a. When minority’s expectations
are frustratedb. When course of dealing has
not been followedc. Only if majority in bad faith
4. In a CHC, involuntary dissolution …a. Has effect of terminating
businessb. Forces business assets to be
soldc. Usually leads to buyout
5. In CHC, buyout orders …a. Are not allowed by statute, only
dissolution availableb. Are allowed by statute, if minority
proves oppressionc. Are an elective “out” for control
group
6. In a CHC, “fair value” …a. Is pro rata “enterprise value”b. Is generally same as FMVc. Is generally subject to minority
discounts
Answers:
Chapter 30Oppression in CHC
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Minority protectionspreads to LLCs …
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Haley v. Talcott (Del Ch 2004)
Haley (50%) / Talcott (50%)
Exit agreement(LLC statute)
Judicial dissolution(corporate statute)
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Haley v. Talcott (Del Ch 2004)
It is inequitable to force Haley to use the exit mechanism [in the parties’ operating agreement]. Haley would be left liable for the debt of any entity over which he has no further control.
With no reasonable exit mechanism [despite the contractual “fair value” provision in LLC operating agreement] I find that Haley is entitled to judicial dissolution [under the Delaware two-shareholder corporate dissolution statute]. Vice Chancellor Leo Strine
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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The end
Corporations:A Contemporary Approach
Chapter 30Oppression in CHC
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Bonavita v. Corbo (NJ Super 1996) New Jersey Superior Court:
"... Alan Corbo will continue to make decisions which are in his best interests (and those of his family) and ignore the wishes, needs and the best interests of the shareholders. “
"... Regardless of whether defendants’ action might otherwise be termed “wrongful” or “illegal” there is no question that defendants’ conduct has destroyed any reasonable expectations that plaintiff may have enjoyed respecting her stock interests. …. Defendants’ actions do indeed constitute “oppression”.