Business Organizations

28 July

• Definition of a partnership: know that.
• 30 questions.
• Know things like: notice is required for a special meeting: need to say what's on the agenda.
• Don't need to memorize word for word-- just know the concepts. Know the concepts behind Red Hat. Piercing the veil (not in the statutes; that's in the cases). Don't need to know specific facts or results of cases. But need to know when the court will pierce the veil, what the elements are.
• Classic squeeze-out/freeze-out techniques:
  • Remove as employee: no salary
  • No dividends: this increases the majority's compensation, normally, and it means that the minority gets no benefit from being a shareholder.
  • Remove as director: no management control, no access to information.
  • Low price for shares: no market.
  If you have these factors, and you're a closely-held corporation, you probably have minority oppression.
• In closely-held corporations, courts go back and forth about whether there is a heightened fiduciary duty to protect minority shareholders. And the set of remedies available is pretty patchwork, as well. Courts try not to get involved in second-guessing management, and micro-managing corporations. They'll generally defer to management, even if their decisions are imperfect. But in cases of opression, they go the other way.
• Shareholders don't generally owe a fiduciary duty to one another. Generally fidicuary duties arise when there's some kind of agency relationship or authority to act on the part of someone else. Majority shareholders can elect directors, or ratify proposals to merge, etc. In a closely-held corporation, the shareholders are directly involved in management, so why isn't a fiduciary duty as directors or officers suficient? What can they do as shareholders that they can't do as directors and officers? Removing directors, maybe. Note that in that classic squeeze-out, the shareholders probably didn't do much: it was directors and officers, for most of those categories.
• Courts disagree about whether there even is minority oppression, let alone what the remedies are. Why create this duty on the part of only some shareholders, when other duties might suffice?
• Elmaleh v. Barlow
  Note that in a public company, a minority investor can't necessarily recoup all of their investment, but they can at least get some back.

  Anyway, once the court decides that the standard for opression of minority shareholders doesn't apply here, it shows great deference to the board, even though their actions were clearly harmful to the minority.

  So what is it about that test which justifies the imposition of a fiduciary duty? It shows when it's impossible to separate the interests of shareholder and director and officer: they're so commingled that a general fiduciary duty arises (i.e., you're no longer acting purely as an officer or a director).

• Leslie v. Boston Software
  So here, the test succeeds, and the court creates some remedies. There's a fiduciary duty to Leslie, even though he's a nightmare for the corporation.

  Where does the court get the idea that a 1/3 shareholder necessarily gets a seat on the board? If he wanted that, couldn't he have negotiated this? The shareholders are within their rights to vote him out as a director.

• So, are we concerned with the actions of the majority, or the expectations of the minority?
• Kiriakides v. Atlas
  So this really comes down to a statutory construction issue, and the court of appeals goes with a "reasonable expectations" approach, and the supreme court says this is beyond the scope of the statute.

  But there was a classic squeeze-out, and if you violate those expectations (of not being squoze out), that's bad. But still, the focus here is on what the majority did.

• Naito v. Naito
  So here, two directors control the board, and the other two directors just rubber-stamp things.

  Interesting: the court finds that this is oppressive, but not "so oppressive that extreme remedies are required." Where do they get off inventing levels of oppression? It's either there or it's not. The board either breached their fiduciary duty with the dividend policy or it didn't.

  So the treatment of these issues in court is pretty random.

• Problem 7-2
  Oppression of the majority. Can there be such a thing? And if so, aren't there remedies in place? (abuse of process, tortious interference, etc.). Seems like people are trying to create new claims outside of the statute and the parties' contracts. That's not necessarily a good idea.

  As a result, majority oppression is not generally an accepted concept. But it points out that shareholders don't generally owe one another a duty just by virtue of being shareholders.

• And look: in most of these cases, there would have been no problem if the parties had contracted more wisely. Naito is the exception, because the parties inherited their shares, and didn't get to contract.