Closely held corporations in Michigan may have one shareholder or a small group of shareholders who hold majority control of the company. When majority shareholders wield their power and influence, minority shareholders may feel as though the majority or the board of directors has mistreated them. Those minority shareholders may bring oppression claims against founders or majority owners of businesses.
It’s important for Michigan business owners to understand what can give rise to a shareholder oppression claim, the remedies courts can order for such claims, and the steps companies can take to mitigate the risks of an oppression claim.
The Basics of Oppressed Shareholder Claims
Under Michigan law, a shareholder may have an oppression claim when they allege that the acts of the directors or controllers of a corporation involve illegal, fraudulent, or willfully unfair or oppressive conduct towards the corporation or the shareholder. The law defines “willfully unfair and oppressive conduct” as a continuous course of conduct, significant action, or series of actions that substantially interfere with the shareholder’s interests as a shareholder. Conduct may include the termination of employment or limitation on employment benefits to the extent the conduct interferes with distributions or other shareholder interests disproportionately.
Shareholders typically bring oppression claims when a majority shareholder or the board of directors abuses their ability to control the corporation, usually to the minority shareholders’ detriment.
Common Examples of Shareholder Oppression
Examples of actions that may constitute shareholder oppression include:
- Excluding minority shareholders from annual or special meetings
- Withholding dividends or compensation to specific classes of shareholders while other classes of shareholders benefit
- Diluting equity stakes or issuing new stock to reduce minority influence or voting power, including by conducting unnecessary capital calls that minority shareholders cannot afford to participate in
- Forcing minority shareholders out of the company through buyouts that pay far below fair market value for their shares
Legal Remedies in Michigan
In a Michigan shareholder oppression claim, a shareholder who proves oppression by the board or controlling shareholders may pursue various remedies from the court. Some examples of remedies that courts may order for shareholder oppression include:
- The dissolution of the corporation and liquidation of its assets
- The cancellation or modification of a provision in the articles of incorporation or the bylaws
- The cancellation, alteration, or injunction against a resolution or other act of the corporation
- The mandate or prohibition of an act of the corporation, the shareholders, the directors, the officers, or other parties to the shareholder oppression action
- The purchase, at fair value, of the shareholder’s shares by the corporation, the officers, the directors, or other shareholders responsible for the wrongful act(s)
- An award of compensation to the corporation or shareholder
Under the statute of limitations, a shareholder seeking an award of compensation must file their oppression claim within three years of the alleged oppressive act or two years of the date that the shareholder discovered or should have discovered the oppressive act, whichever occurs first.
Preventing Shareholder Disputes
Business owners can reduce the risk of an oppressed shareholder claim that can lead to a significant legal dispute by:
- Drafting clear and comprehensive shareholder agreements and bylaws that outline shareholders’ rights and minority protections, or dispute resolution procedures that can help resolve oppression claims more quickly
- Maintaining transparency in financial records and decision-making by officers and the board
- Adopting buy-sell provisions in the bylaws or shareholders’ agreements to provide fair exit opportunities for shareholders who have disputes with the board or controlling shareholders
Contact a Shareholder Disputes Attorney
If a minority shareholder of your corporation claims that you or your board have intentionally mistreated them, your company may face a potentially expensive and time-consuming shareholder oppression lawsuit. Contact August Law today for a confidential consultation with a shareholder disputes lawyer to learn more about oppressed shareholder claims and what steps you can take to protect your or your company’s rights and interests.