Case Analysis: Minor v. Albright: Shareholder Oppression Claim in Delaware Corporation

Minor v. Albright, No. 01 C 4493, 2001 WL 1516729 (N.D.Ill Nov. 28, 2001.).

Plaintiffs are two minority shareholders (owning 4% and 2% respectively) in a Delaware corporation doing business in Illinois. Plaintiffs claimed that defendant terminated their employment, in breach of a written employment agreement; that defendant excluded their participation in corporate decisions, including major decisions such as the sale of a plant and soliciting additional investors; and that he transferred $340,000 from the Corporation to himself and his wife. Plaintiffs brought claims for shareholder oppression, breach of the employment agreement, and derivative claims for breach of fiduciary duty. Defendant moved to dismiss for failure to state a claim. The court denied the motion.

With respect to the shareholder oppression claims, those claims were pleaded under the Illinois Business Corporations Act. The court held that Delaware law governed the shareholder claims, but also held that Delaware law recognized a cause of action for shareholder oppression, citing Litle v. Waters, 1992 W L 25758 (Del. Ch. February 11, 1992). The Court held that under Delaware law, a majority shareholder committed oppressive conduct either by (1) violating the reasonable expectations of the minority shareholders, "the spoken or unspoken understandings on which the founders of the venture rely when commencing a venture," or (2) "burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice to some of its members; more visible departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrust his money to a company is entitled to rely." The Court rejected the defendant's argument that plaintiffs' claims were solely related to their employment contracts, and thus found Riblet Products Corp. v. Nagy, 683 A.2d 37, 40 (Del. 1996), inapplicable. The Court noted that the plaintiffs had pleaded more than mere breach of the employment agreements, including allegations of no longer consulting with them about management decisions, including major decisions that could materially affect plaintiffs' stock interests, and attempting to coerce them into selling their shares for a nominal sum. "Freezing out minority investors who expected to be involved in management could also arguably violate fair play." The court also rejected defendants' argument that the allegations of waste and misappropriation of corporate assets should not be considered on the shareholder oppression claim. The court agreed that those claims must be brought derivatively, and noted that the plaintiffs had done so. However the court also held that such conduct could be considered on the shareholder oppression claim, citing the "special injury" exception. See Elster v. American Airlines, Inc., 100 A.2d 219, 222 (Del.Ch. 1953). The court probably misapplied the special injury rule, which allows an individual cause of action for breach of fiduciary duty where the shareholder suffers injury that is different from that suffered by the shareholders generally. The injury suffered directly as a result of the waste and misappropriation was not different in kind or degree for the plaintiffs than for any other shareholder; however, the Court was correct in holding that conduct for which a remedy may only be sought through a derivative claim, many nonetheless make up part of the factual basis of a shareholder oppression claim is that conduct was either directed at the rights of the minority shareholder were otherwise diminishes the interests of a minority shareholder and the remedy sought is not for the damages directly caused by the breach of duties to the corporation. The Court noted that "the complaint alleges that this was part of a scheme by the Albrights to freeze Minor and Ingerslew out of the Corporation. These same actions discussed above -- cutting minority shareholders out of corporate decisions and attempting to coerce an unfair buy out -- are distinct injuries." The Court held that the plaintiffs may not recover damages for termination of their employment contracts or for harm suffered to the Corporation that affects shareholders generally under the shareholder oppression counts.