Shareholder Oppression and “Mistreatment” in Iowa Corporations – The Reasonable (And Variable) Expectations Test

Image result for Polk County Iowa Courthouse

Are the actions that constitute shareholder oppression (i.e. mistreatment) the same across all Iowa businesses? Put differently, are shareholders in ABC, Corp. entitled to the same rights and “reasonable expectations” of treatment as shareholders in XYZ, Corp.?  In short, according to the Iowa Business Court, no, there is not a one-size-fits-all approach as “…the categories of conduct and circumstances that will constitute oppression…” vary.  Indeed, whether certain actions arise to shareholder oppression will not only vary from business to business, but potentially from shareholder to shareholder.

In Horn v. R.H. Van Horn Farms, Inc., LACV39149 (Iowa Business Court 2017), the Iowa court considered whether a plaintiff suffered shareholder oppression based upon specific allegations of misconduct.  Throughout its analysis, the court explained how shareholder oppression is evaluated relative to a shareholder’s reasonable expectations (the “reasonable expectations test”).  Applying this test, the court opined that if a shareholder’s reasonable expectations are frustrated, the shareholder may be entitled to relief.

Importantly, shareholder expectations are shaped by several variables.  For example, expectations may be shaped by whether a shareholder came into possession of stock by making an investment or inheriting stock.  Quoting the Iowa Supreme Court, the court reiterated:

[S]omeone who buys a minority interest in a closely held corporation has made a business decision to take a minority position. Whereas a minority shareholder who receives shares by gift or inheritance does not make a similar business or investment decision, and may have different expectations.

The court’s analysis and further citations include language stating that shareholders who come into possession through receiving stock as a gift or through an inheritance “…may lead to a conclusion that Continue reading

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Open Records Requests – Fees & Policies

FileStackUtilizing Iowa’s Open Records laws is often one avenue businesses, news media, and individuals use to obtain information.  On July 19, 2017, the Iowa Court of Appeals reiterated that Iowa law permits public entities to recover their costs for complying with an open records request.  See Hackman v. New Hampton Municipal Light Plant, No. 16-2063 (Iowa Ct. Appeals July 19, 2017).

In Hackman, the New Hampton Municipal Light Plant sought to charge an individual, Jacob Hackman, $828.30 for services performed in response to Hackman’s open records request as well as $75.80 for copies.  Hackman filed a lawsuit against the Plant challenging the Plant’s ability to charge such fees.  Citing Iowa Code Section 22.3, the Iowa Court of Appeals concluded “the fees charged by the Plant were authorized by statute.”  In support of its decision, the Court underscored the fact that the Plant had a “written policy outlining a $35 per hour fee for research related to complying with an open records request.”

In addition to reiterating the ability for a public entity to recover specified costs, this opinion highlights the importance: (1) for businesses and individuals to understand if, and how, a public entity will charge for services performed in response to an open records request; and (2) for public entities to implement a clear, written policy relative to any fees charged for services in response to an open records request.

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The 2017 Legislative Session, By the Numbers

des-moines-1728523_960_720The 2017 session of the 87th General Assembly convened on January 9, 2017 and adjourned Sine Die, 104 days later, on Saturday, April 22, 2017 at 7:14 a.m.  During this 104 day period, 1653 bills were introduced, of which 174 bills were signed into law.  Click for a complete list of bills signed into law, their titles, and effective dates.  During this past session, in the House of Representatives the Education Committee saw the most bills introduced, 76, and in the Senate, the Judiciary Committee saw the most bills introduced, 85.

The second session of the 87th General Assembly will convene on Monday, January 8, 2018.  It has been widely reported, however, that depending Continue reading

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When Owners in an LLC Are Personally Liable

what-is-liabilityEntrepreneurs and business owners often elect to create a formal business entity, such as a limited liability company (“LLC”), to shield themselves from personal liability.  In other words, they create such an entity to ensure that if an adverse court judgment is entered in relation to the business’ activities (e.g. breach of contract; slip & fall; infringement, etc.), the judgment is solely collectible against the LLC and not against the individual owner(s) in their personal capacity.

A recent Iowa Court of Appeals case illustrates that limited liability is not an “automatic” benefit conferred upon business owners when creating an LLC. Specifically, the Iowa Court of Appeals determined Continue reading

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Iowa’s Open Records Law – Who, What, When, and Why?


Iowa’s Open Records laws permit Iowans and Iowa businesses to obtain numerous types of records and communications from government bodies and officials (e.g. state departments, cities, and schools). Frequently, Iowans and Iowa businesses use these laws to obtain general information about government activities as well as information about how competitors may be communicating with the government. Access to such records is governed by Iowa Code Chapter 22.

Who may request a public record?

Iowa Code Chapter 22 explains how “[e]very person shall have the right to examine and copy a public record…” Iowa Code 22.2 (emphasis added).  Put another way, Continue reading

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Single Taxation Versus Double Taxation and the Iowa LLC

As discussed in this prior post, Iowa Limited Liability Companies have the benefit of electing to have a single layer of tax.

imagesWhen an LLC chooses a single layer of tax, LLCs are taxed as pass-through entities, meaning all earnings pass through to its members (i.e. owners) in the year they are earned and are not taxed at the corporatelevel. Comparatively, in a traditional corporation, the corporation is taxed on earnings and then its shareholders (i.e. owners) are taxed on any dividends when distributed – often referred to as double taxation.

For demonstration purposes, the following example helps illustrate the difference.

Assume ABC Entity, a new small business, sells 100,000 widgets for a net taxable income of $100,000. Assume that the tax rate for corporations on this income is 20 percent, and the personal income tax rate for the owner is 25 percent. ABC Entity and its owner would pay the taxes shown on the following table.

Corporation LLC Electing Pass-Through Taxation
Corporate Net Income (Revenue-Costs)  $100,000  $100,000
Corporate Tax @ 20%  $20,000  N/A
Income Available To Distribute  $80,000  $100,000
Dividend Taxes @ 15%  $12,000  N/A
Personal Income Tax @ 25%  N/A  $25,000
Earnings After Taxes  $68,000  $75,000

Pass-through taxation can have significant advantages for small-business owners. In this hypothetical, ABC Entity’s owner would save approximately $7,000 in taxes. Actual results will vary depending on, among other items, the size of the business, the owner’s other income, the marginal tax rates of the corporation and owner.

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3 Key Differences Between an Iowa LLC and a Corporation

The_DecisionsWhether you are looking to form a new business, or perhaps you are seeking personal liability protection by “upgrading” your existing business entity, you may find yourself wondering what is the difference between an Iowa Limited Liability Company (LLC) and a traditional Iowa Corporation (C-corp). Here are three key differences between an Iowa Company (LLC) and an Iowa Corporation (Inc.):

  1. Single Taxation v. Double Taxation LLCs may be treated as “pass-through” entities at the election of its owners. In other words, the members (i.e. owners) of an LLC are allowed to pass their share of the company’s profits to their personal income tax return. A corporation on the other hand has two layers of taxation. A corporation’s first tax level occurs when the company files taxes as a business. The second tax occurs after dividends are paid to the corporation’s shareholders, who are then required to pay taxes on dividends received from a corporation on their personal income tax return. In short, while members in an LLC can take advantage of a single layer of taxation, shareholders in a corporation cannot.
  2. Legal Formalities Iowa business law requires corporations to follow many more formalities than their LLC counterparts. For example, corporations must maintain certain books and records of the corporation, including minutes from all director and shareholder meetings  Comparatively, LLCs are not required to maintain minutes from meetings that occur. Similarly, while a corporation is generally required to have an annual meeting, there is no such formal requirement for LLCs. Additionally, while LLCs are not required to create financial statements that detail the company’s financial status, corporations are required to prepare annual financial statements for its shareholders.
  3. Management Structure Members in an LLC can elect to manage the LLC’s daily affairs. Alternatively, the members can also choose to hire non-member managers to oversee day-to-day activities. Such flexibility allows an LLC’s owners to participate in managing the company. Comparatively, corporations have rigid management structures that must be followed and which consist of shareholders, directors, officers and employees. As a result of such rigid structures, unlike an LLC, the owners (i.e. shareholders) do not necessarily participate in managing the entity, which in a corporation is generally left to elected directors and officers.
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Iowa Shareholders Can Remove a Director From the Board of Directors

6306132745_347e21a6e8_o-1Shareholders in large and small corporations often inquire: How is a director removed from a corporation’s board of directors?

The question may be posed out of concern that the shareholder – who also serves as a director – feels threatened about being ousted as a director. Alternatively, the shareholder may be frustrated with a particular director’s conduct and is seeking a change in board composition and leadership. Either way, in theory, removing a director from a corporation’s board of directors is relatively straightforward.

As the corporation’s owners, shareholders possess power under Iowa law to “remove one or more directors” in an Iowa corporation. Importantly, pursuant to Iowa law, so long as the corporation’s articles of incorporation do not state otherwise, “shareholders may remove one or more directors with or without cause.” In other words, if the corporation’s articles of incorporation are silent and do not address the issue, shareholders may remove a director or directors without providing any justification for their decision – they can simply act and remove the director(s).

Notably, however, if a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove that director.

As with many corporate actions, removing a director requires shareholders to follow a very specific process. For instance, as of the time of this posting, shareholders may only remove a director at a shareholder meeting that is called for the express purpose of removing the director and after proper notice is provided. The notice must state that the purpose (or one of the purposes) of the meeting is removing the director(s).

Additionally, a shareholder may also petition a court and request a judge remove a director from the board. Not surprisingly, there is also a very specific process by which to seek removal through the court system.

If you are considering removing a director from your Iowa corporation’s board of directors, or if you are a director concerned about future removal, you should consider contacting a licensed attorney who practices in this area of law.

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Do Fiduciary Duties Apply Between Equal, 50/50 Shareholders?

SealIAFiduciary duties are often described as the highest duties recognized under the law.  Their application, however, is often challenged by litigants in court.  In a recent case before Iowa’s Business Courtthe Honorable Judge John Telleen was tasked with determining whether equal, 50/50 shareholders in a corporation are charged with exercising fiduciary duties in their dealings with each other.

Judge Telleen began the June 4, 2015 opinion by explaining Iowa’s long history of applying fiduciary duties: (1) by directors and officers of a corporation to the corporation and its shareholders; (2) between a majority shareholder and a minority shareholder; (3) between joint venturers through the life of a venture and its dissolution; (4) between partners in a partnership; and (5) between shareholders in closely held corporations.  After reviewing and explaining Iowa’s well-established history of applying fiduciary duties in numerous business settings, Judge Telleen concluded, “[e]qual shareholders owe each other a fiduciary duty” (emphasis added).  In support of this holding, the court explained

[i]f equal partners, joint venturers and shareholders in closely held corporations owe each other [sic] fiduciary duties, the Court sees little reason why those same duties should not be required of equal shareholders.

Idat 13.  Based upon the holding in this June 2015 opinion, 50/50 shareholders in Iowa corporations should consider exercising caution in their dealings with one another consistent with the fiduciary duty concepts adopted and imposed upon Iowa shareholders.

Click here to learn more about the who, what, when, where, and why of fiduciary duties.

Download a copy of the June 4, 2015 Opinion.  A special thank you to Ben Weston, of Lederer, Weston, and Craig for providing a copy of the Opinion.  

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Protecting Your Trade Secret in the Court of Law

Iowa Trade Secret

Savvy business owners understand the value of protecting proprietary information; especially when the information provides a competitive advantage in the marketplace (commonly referred to as a trade secret).  What happens, however, when your business is unexpectedly defending claims in our public court system or protecting itself by filing a lawsuit in open court?  Will your business’ trade secrets be publicly exposed?  Will a competitor have access to the Court’s public records (now online statewide) and the ability to review proprietary practices, pricing, or customer lists revealed through litigation?  Fortunately, Iowa’s courts are empowered to protect your business’ trade secrets.

A recent Iowa Supreme Court opinion, filed June 26, 2015, identifies several protections that Iowa’s courts may employ to preserve trade secrets, including:

  1. Closing court proceedings to the public;
  2. Sequestering witnesses during testimony of other witnesses;
  3. Excluding parties from the courtroom when trade secrets are presented;
  4. Restricting attendance at trial; and
  5. Sealing transcripts of court proceedings.

Our high court also recognized “[i]t would be of little practical value to file a lawsuit to protect the confidentiality of a trade secret if the secret became part of the publicly available court record and was thereby lost.” In short, while our court system is open and public by design, sophisticated parties can and do protect their trade secrets in the court of law.

Click here to to learn more about whether your information may qualify as a trade secret in Iowa.
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