New Statutory Protections for Minority Shareholders

By Thomas B. Eriksen

Under prior law, minority shareholders of Oregon corporations had limited remedies for dealing with oppressive conduct by majority shareholders. A court could order dissolution of a corporation in a proceeding brought by a minority shareholder if the shareholder could establish that those in control of the corporation acted in an illegal, oppressive, or fraudulent manner. A harsh remedy to be sure, and perhaps not in the best interests of the minority shareholder.

Effective January 1, 2002, a new statutory provision gave minority shareholders of closely held Oregon corporations additional tools for dealing with oppressive conduct by those directors or shareholders in control of a corporation. The court now has more than a dozen potential remedies at its disposal to fashion appropriate relief for oppressed minority shareholders.

The new remedies include removal of a director or officer, appointment of an individual as a director or officer of the corporation, the performance, prohibition, alteration, or setting aside of any action of a corporation or its directors or officers, the cancellation or alteration of any provision of a corporation's articles of incorporation or bylaws, the issuance of distribution, and the award of damages to oppressed shareholders.

In determining the appropriate remedy for oppressive conduct, the court may consider the reasonable expectations of shareholders at the time a corporation was formed, and those that developed over the course of the shareholders' relationship. The new statute further directs the court to fashion a remedy to minimize the harm to the business of a corporation. This is a far cry from the old remedy of dissolving a corporation, which would likely destroy the business of a corporation.

If the court is unable to craft a remedy that allows the shareholders to continue in business together, the court can order a corporation or its other shareholders to purchase the shares of the minority shareholder. If a corporation does so, the court also determines the "fair value" of the minority shareholder's shares of the corporation. In doing so, the court must take into consideration any impact on the value of the shares resulting from the oppressive conduct of the controlling shareholder that give rise to the lawsuit. Fair value does not include a discount for minority interest, and a discount for lack of marketability does not apply if the controlling shareholder's conduct was, in fact, established to be oppressive.

In an attempt to level the playing field, the new statute also includes a provision that permits controlling shareholders to force a sale of minority shareholder shares. The new statute provides that, within 90 days of the filing of an oppression-type lawsuit by a minority shareholder, the controlling shareholder can elect to purchase the shares of the minority shareholder. If this happens, the minority shareholder's oppressive action is suspended and the court proceeds with a determination of the "fair value" of the minority shareholder's shares. The same valuation considerations mentioned above also apply in this situation.

The new statute allows shareholders to limit or eliminate some of the new remedies by agreement among all the shareholders. However, care must be taken in crafting such a shareholder agreement, since several statutory requirements must be satisfied, and a poorly drawn shareholder agreement may limit the court's flexibility in crafting an appropriate remedy. With these new tools available, circuit court judges will have a lot more flexibility in resolving disputes among corporate shareholder.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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