Oppression / Freeze-out

Am I Oppressed?

A Minority Shareholder’s / Business Owner’s Diagnosis

In businesses and corporations (of all sizes) across the country, the law generally requires management to act in accordance with their fiduciary duties.  A fiduciary duty requires, among other things, that management act in good faith and in a manner reasonably believed to be in the best interests of the corporation.  If a director, officer, or member of management is failing to act in accordance with these and other duties and you are harmed – you may be oppressed.

Oppression or “freeze-out,” as it is commonly diagnosed, often occurs in smaller corporations where management and ownership are held by a close / small group of individuals.  In these “close corporations” the relationship amongst the owners and management must be one of trust, confidence, and absolute loyalty – all characteristics of a fiduciary relationship.  Disloyalty and self-seeking conduct, however, will often result in bickering, corporate stalemates, and possibly dissolution (terminating the company).  It is the latter of these symptoms that frequently metastasize into oppression.

Just like a sickness, the onset of one symptom is generally insufficient to diagnose a problem or oppression.  However, once the symptoms spread and multiply oppression can set in.  Oppression has been found to occur when management:

1. Refuses to declare dividends;

2. Pays out exorbitant salaries and bonuses (to either themselves and/or their relatives);

3. Causes the corporation to pay high rent for property leased from the officer / director;

4. Deprives the minority owner employment in the company;

5. Causes the corporation to sell its assets at an inadequate price to majority shareholders / management;

6. Using corporate funds for personal or non-corporate use; and

7.  Disregards a shareholder’s reasonable expectations.

When a minority shareholder suffers from oppression in a close corporation they are often left without a job and an illiquid asset (their stock / ownership interest).  Routinely, shareholders in a close corporation have a substantial percentage of personal assets invested in the corporation and may rely upon a salary from the corporation for income.  Thus, once oppression sets in, a suffering shareholder cannot afford to passively wait for things to change.  The suffering shareholder is left with no option but to liquidate his/her investment in the close corporation in order to reinvest in an income-producing enterprise.

In a large public corporation, where stock is traded on an index (such as NASDAQ), an oppressed or aggrieved shareholder has a market to sell his/her stock in order to get out.  Unfortunately, however, an oppressed shareholder in a close corporation, by definition, does not have a public market to sell the shares (i.e. he/she cannot call up a broker and sell the stock).  And, not surprisingly, the very management that is causing the oppression is frequently unwilling to buy back any shares from the oppressed shareholder.   As such, an oppressed shareholder is left holding stock in a company that does not pay dividends, does not recognize the shareholder’s reasonable expectations, and will no longer provide gainful employment.

Fortunately, the law has developed cures for truly oppressed shareholders.  Remedies for oppression include forcing a buy-out at a fair price, dissolving the corporation and liquidating its assets, removing management, ordering dividends, and many others.  If you believe you may be experiencing certain symptoms of oppression, are suffering from oppression, or simply have questions on the matter you may want to consider contacting a licensed attorney.

For a 2011 Iowa Court of Appeals opinion on oppression and freeze out, click here.

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About Matthew McKinney

Attorney focused on civil and commercial litigation.
This entry was posted in Business Owner, Litigation, Shareholder and tagged , , , , , , , , , , , , , . Bookmark the permalink.

4 Responses to Oppression / Freeze-out

  1. Pingback: The Relief You May Seek if You Are Suffering From Shareholder Oppression | Business and Corporate Disputes

  2. Pingback: 10 Characteristics of Shareholder Oppression in an Iowa Business – The Iowa Court of Appeals Explains | Business and Corporate Disputes

  3. Pingback: Oppression, Breach of Fiduciary Duties, Freeze Out, and Judicial Dissolution – An Iowa Court of Appeals 2011 Analysis | Business and Corporate Disputes

  4. Pingback: An Introduction to Fiduciary Duties in Small Businesses and Corporations | Business and Corporate Disputes

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