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 no specific reasonable expectations exist at all.” In sum, under the reasonable expectations test, there is not a one-size-fits-all approach as to what constitutes shareholder oppression in Iowa. Rather, “whether the majority or controlling shareholders have engaged in oppressive conduct is a fact intensive inquiry requiring an examination of the objectively reasonable expectations of the complaining shareholder and the actions of the defendants measured in terms of their fiduciary duties and in light of the totality of the circumstances [while also considering the business judgement rule].”
If you are either a controlling shareholder, majority shareholder, or minority shareholder in an Iowa corporation that is seeking guidance regarding what constitutes shareholder oppression or breach of fiduciary duty, you should consider consulting with a licensed attorney with experience handling such matters.
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