(Mont. Oct. 28, 2008).
The Montana Supreme Court issued a new shareholder oppression case which comes close to the classic definition of the word "chutzpah." The case involved a family farm corporation. One of the owners did a consistently poor job, lied to his fellow shareholders, and ultimately stole a substantial amount of grain which he sold. At last, the remaining shareholders called a meeting and voted to remove the malefactor as an employee, officer and director. The shareholder received notice, but did not attend. Later, the shareholder did attend the annual meeting, where he had sufficient votes to assure himself a seat on the board of directors, but did not nominate himself. The shareholder sued for oppression. The case was tried to the bench, and the trial court held that the shareholder had not been oppressed and further entered a judgment for damages against the shareholder for conversion. The Supreme Court affirmed.
The shareholder initially argued that he was oppressed by his termination of employment. On appeal, he conceded that the termination was justified, but argued that his reasonable expectations of accessing the value of his shares were frustrated. In other words, the shareholder argued that the he was oppressed by his inability to sell or cash out his shares. The Supreme Court held that the inability to sell shares in a closely-held corporation was the nature of the beast, and the shareholder was complaining of a situation that every other shareholder experienced. The corporation had never paid dividends but had made employment and salaries available to all shareholders and had paid money only to shareholders who contributed to making the corporation successful. The shareholder had received the same deal as every other shareholder, and had lost the ability to participate only because of his own wrongful conduct.
The shareholder's lawsuit had very poor timing, and the position was poorly stated, but he did raise an important and difficult issue. This case shows the limits of the reasonable expectation of continued employment. The court implicitly held that this expectation cannot possibly overcome good cause for termination. However, while a corporation should not be required to keep an employee in the face of dishonesty and theft, the fired shareholder remains a shareholder and cannot be forever denied all possibility of an economic return on share ownership. To hold otherwise would permit a corporation to effectively cancel share ownership as a punishment for misconduct as an employee, when the appropriate consequences are loss of employment and payment of damages--both of which happened in this case. When shareholders of a closely held corporation elect to employ all the shareholders and to allow shareholders to receive an economic return by means of salary and bonuses, and then the situation changes so that not all of the shareholders continue to participate through employment, then the corporation has a fiduciary duty to reconsider the policy on how shareholders participate. If some shareholders cannot participate economically through employment, then the corporation must set salaries solely on the value of the services and pay any excess profit through dividends or some other arrangement in which all shareholders can participate. At the point in time when the Whitehorne plaintiff brought his lawsuit, the corporation and other shareholders had done nothing oppressive, and the shareholder would certainly have been barred from seeking equitable relief because of unclean hands (the court did not address this issue). At some point, however, the corporation's conduct could very well become oppressive if the corporation were consistently profitable and yet the corporation continued to pay out all profits through high salaries to shareholder-employees and to exclude the non-employees shareholder from any participation. The Montana Supreme Court indirectly acknowledged this situation in noting that there was no evidence of oppressive intent and no reason to assume that the other shareholders might not offer to buy out the plaintiff in the future.
Eric Fryar
Fryar Law Firm P.C.
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