Shareholder Oppression in Delaware
Delaware does not have a cause of action for oppression per se, but it does offer relief for claims similar to the oppression of minority shareholders that apply other legal principles. Therefore, claims similar to oppression must be carefully defended in Delaware.
Since courts in other states are likely to apply Delaware law to claims similar to the oppression of Delaware organized companies, vigilance should also be exercised when filing claims involving Delaware corporations in non-Delaware courts. Some courts outside of Delaware, such as the Southern District of New York and the Northern District of Illinois, have upheld causes of action for oppression of shareholders under Delaware law, while others, such as the District of New Jersey, have dismissed oppression lawsuits for breach. to file a claim under Delaware law.
Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), is a Delaware case that is often cited for the proposition that Delaware does have a shareholder oppression remedy, and also for the proposition that it does not. The case states that “[t]The full fairness test, properly applied and articulated, is the proper judicial approach “to decide claims brought by minority shareholders against those who control the corporation. Therefore, some conclude that claims of oppression can be pursued under all doctrine. of equity.
However, Nixon v. Blackwell also contains language that seems to indicate otherwise:
A shareholder who trades for shares in a closed corporation and who pays for those shares … can make a business judgment as to whether to buy in such a minority position and, if so, under what conditions. The final provisions of self-order allowed to a Delaware corporation could be negotiated through the certificate of incorporation or the statutes by reason of the provisions in [Delaware law, and] in addition to such mechanisms … [such as] Prepare proof of earnings, purchase dispositions, voting trusts or other voting agreements. Good corporate practice tools are designed to provide the purchasing minority shareholder the opportunity to negotiate protection before exiting the consideration.
This lack of sympathy for minority shareholders who have not negotiated written protection of their rights fails to acknowledge that minority shareholders are often in the minority due to factors they could not anticipate at the start of the business, and that even the best and more Broad shareholder agreements cannot address all of the many varied and creative ways in which the majority can use their power to unfairly harm the minority.
However, many of the claims that fall under the general category of shareholder oppression can be brought under Delaware law using other legal principles accepted in that State.
The whole doctrine of equity, mentioned above, is one of them. It is an exception to the business judgment rule, which would normally protect the actions of the directors from judicial scrutiny and creates a framework to grant relief to minority shareholders when the directors act in their own interest. Therefore, when a minority shareholder shows that the directors are on both sides of a transaction or that they will derive a special benefit from the transaction, that is, there is a conflict of interest that produces a benefit that the other shareholders generally do not share, then Directors or those in control must demonstrate both fair treatment and fair price, a high standard. All equity analysis essentially requires judicial scrutiny of a transaction or action.
Delaware recognizes that controlling shareholders have fiduciary duties to their fellow shareholders. “[W]hen a shareholder presumes to exercise control over a corporation, to direct its actions, that shareholder assumes a fiduciary duty of the same type as that owed by a director. “Sterling v. Mayflower Hotel Corp 93 A.2d 107, 109-10 (Del. 1952) Therefore, many types of conduct that would give rise to claims of oppression in other jurisdictions would also support claims of breach of fiduciary duty in Delaware.
Controlling shareholders can be held liable in Delaware when:
- causing the corporation to issue additional shares to the controlling shareholder at an inappropriate price;
- reduce the economic value of minority shares disproportionately or affect their voting rights;
- participate in a trading course designed to force the minority to enter below fair market value for their shares; gold
- selling your majority stake to a buyer without due diligence to ensure you were not a corporate looter or scammer.
In Delaware, it is very important to determine whether the claims brought against those in control are direct claims, in which minority shareholders were directly harmed by the failure to perform fiduciary duties; or derivative claims – in which the corporation is injured. The distinction between direct and derivative claims in Delaware can often determine whether a claim can proceed and what steps must be taken before it can be filed. The rules for distinguishing direct claims from derivatives can often be complex and appear to be constantly evolving under Delaware law, which we will address in a later post.