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Closely Held Businesses and Shareholder Oppression

Most businesses are closely held by just a handful of owners as either a corporate shareholder, or a limited liability company member, who manage the daily affairs and business planning decisions of the company. These types of companies are usually controlled by Bylaws, Buy-Sell Agreements, Operating Agreements, and other contracts between the ownership pool. Sometimes, tension may arise between the owners of the company, and without written agreements in place, a majority member may attempt to interfere with the rights of a minority member. When this happens, one remedy that the minority member may take is to bring a claim against the majority member for shareholder oppression.

To bring a claim against a majority member, the minority member must show willfully unfair or oppressive conduct. What exactly the courts find to be willfully unfair or oppressive conduct has been in flux over the past decade. Prior to 2006, the courts only allowed minority shareholders to bring a claim if the actions of the other shareholders affected the minority shareholder's rights as a shareholder. The courts expressly rejected any minority member arguments related to their "reasonable expectations" related to the company management. In 2006, the legislature passed a statute to try to loosen the court's strict standards. This statute allows minority shareholders to bring a claim if the majority shareholders take actions that interfere with the minority member's employment or cash distributions. Still, in interpreting this new law, the courts still require that all claims brought by minority shareholders must be based on the rights of shareholders as shareholders—rights provided for through express agreements amongst the company members. The courts still reject minority member's arguments that their "reasonable expectations" have been violated.

The lesson to take out of all of this: make sure that agreements between members of closely held companies are clearly documented and incorporated into the company minute book. The courts typically will not enforce oral agreements that were based on the minority shareholder's "reasonable expectations." Instead, the court will only enforce rights that have expressly been provided to a member through written agreement. To avoid legal headaches down the road, these agreements should be written and executed as soon as such an understanding is reached between the members of the company.

The topics contained in this article are intended to be general and representative in nature and not specific legal advice for any particular circumstance. Please feel free to contact Duba & Duba, PLLC to inquire about an analysis of your particular facts and circumstances.

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