Delaware does not have a cause of action for oppression per se, but it does offer relief for claims similar to minority shareholder oppression by applying other legal principles. Therefore, oppression-like claims must be carefully defended in Delaware.
Since courts in other states are likely to apply Delaware law to claims similar to the oppression of businesses organized in Delaware, vigilance should also be exercised when filing claims involving Delaware corporations in courts outside of Delaware. Some courts outside of Delaware, such as the Southern District of New York and the Northern District of Illinois, have upheld causes of action for shareholder oppression under Delaware law, while others, such as the District of New Jersey, have dismissed claims of oppression for non-compliance. file a claim under Delaware law.
Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), is a Delaware case often cited for the proposition that Delaware does have a remedy against shareholder oppression, and also for the proposition that it does not. . The case says that “[t]The full fairness test, properly applied and articulated, is the proper judicial approach to deciding claims brought by minority shareholders against those who control the corporation. Therefore, some conclude that claims of oppression can be pursued under the doctrine of full fairness.
However, Nixon v. Blackwell also contains language that seems to indicate otherwise:
A shareholder who trades shares in a closely held corporation and who pays for those shares…can make a business decision about whether to buy a minority position and, if so, on what terms. One could negotiate definitive self-organization provisions permitted to a Delaware corporation through the certificate of incorporation or bylaws under the provisions in [Delaware law, and] In addition to such mechanisms… [such as] drawing up proofs of earnings, purchase provisions, voting trusts, or other voting arrangements. Good corporate practice tools are designed to give a buying minority shareholder the opportunity to negotiate for protection before sharing considerately.
This lack of sympathy for minority shareholders who have not negotiated written protection of their rights fails to recognize that minority shareholders are often in the minority due to factors they could not anticipate at the start of the company, and that even the best and brightest Extensive shareholder agreements cannot address all of the varied and creative ways in which the majority can use their power to unfairly harm the minority.
However, many of the claims that fall under the general category of shareholder oppression may be brought under Delaware law using other accepted legal principles in that State.
The entire doctrine of fairness, mentioned above, is one of them. It is an exception to the commercial judgment rule, which would normally shield directors’ actions from judicial scrutiny, and creates a framework to grant relief to minority shareholders when directors act in their own interest. Therefore, when a minority shareholder demonstrates that the directors are on both sides of a transaction or will derive a special benefit from the transaction, i.e. there is a conflict of interest that produces a benefit not generally shared by the other shareholders, then the directors or those in control will be required to demonstrate fair dealing and fair pricing, an exacting standard. All fairness analysis essentially requires judicial scrutiny of a transaction or action.
Delaware recognizes that controlling shareholders have fiduciary obligations to their fellow shareholders. “[W]When a shareholder presumes to exercise control over a corporation, to direct its actions, that shareholder assumes a fiduciary duty of the same type as that of a director. Sterling v. Mayflower Hotel Corp 93 A.2d 107, 109-10 (Del. 1952) Thus, many kinds of conduct that would give rise to claims of oppression in other jurisdictions would also support claims of breach of fiduciary duty in Delaware.
Major shareholders can be held liable in Delaware when:
- causing the corporation to issue additional shares to the majority shareholder at an improper price;
- disproportionately reduce the economic value of the minority’s shares or affect their voting rights;
- participate in a trading course designed to force the minority to exit below the fair market value of its shares; Prayed
- Selling your controlling interest to a buyer without proper due diligence to ensure they are not a corporate scammer or looter.
In Delaware, it is very important to determine whether the claims brought against those in control are direct claims, where minority shareholders were directly harmed by a breach of fiduciary duties; or derivative claims – in which the corporation is injured. The distinction between direct and derivative claims in Delaware can often determine whether a claim can proceed and what steps must be taken before it can be filed. The rules for distinguishing direct from derivative claims can often be complex and appear to be constantly evolving under Delaware law, which we will address in a later post.
