By Doug Cushing
From the Jordan Ramis Archives
Minority shareholders have long been at risk of oppressive conduct by majority shareholders in control of the corporation. Freeze-outs, squeeze-outs, and a host of other tactics, some legally permissible and others not, have long given majority shareholders the upper hand in any shareholder dispute.
While there were a few minority shareholder protections available by statute, including preemptive rights, cumulative voting, and dissenters rights, these often failed to protect against the financial consequences of oppressive conduct by majority shareholders. Recently, however, the Oregon legislature and the Oregon Court of Appeals have taken action to help level the playing field.
Two recent Court of Appeals decisions have stepped in to ease the detrimental financial impact of such oppressive conduct. The court held that where a majority shareholder engaged in a course of conduct oppressive to the minority shareholders, an appropriate remedy is to require the majority shareholder to purchase the minority shareholders stock for its "fair value."
This is a significant improvement for minority shareholders since, previously, such shares were subject to a "minority interest discount."
A minority interest discount is the recognition of the economic reality that shares that do not allow the owner some measure of influence on the operation of the business are worth less, on a per share basis, than shares that provide some measure of control of the corporation. Minority discounts can range from 25% to 60% of the per share value of the stock.
The court indicated that in situations where the majority shareholder breached its fiduciary obligations to the minority shareholder by freezing the shareholder out and by denying him of all benefit of his stock, the appropriate remedy is to require the purchase of all shares for the pro-rata value of the going concern value of the business. No longer is the minority shareholder subject to discounts for a minority interest, lack of marketability, or lack of control.
The Oregon legislature has also gotten into act and provided for additional remedies for minority shareholders that suffer from the illegal, fraudulent, or oppressive conduct of the Board of Directors or those in control of the corporation. The new remedies include court ordered distributions from the corporation, court ordered purchase of shares, appointment of a custodian to manage the business, and appointment of a specific individual as a director or officer of the corporation.
While the new legislation and court rulings do not put the minority shareholder on equal footing with the majority shareholders, they do provide the minority shareholder with additional tools and techniques for assuring that they are fairly compensated for their holdings in the corporation.