Wednesday, October 14, 2020
Hope everyone is doing ok these days. I have found that by lowering my expectations for myself, I manage to feel a great deal of accomplishment. For example, so long as I shower 15 minutes before my 2:30 pm class (yes, pm), I give myself a hearty pat on the back.
(Just kidding by the way. I am almost always showered by 2:00 pm. [Winky-face emoji if I could do it.])
In working on some presentations with Professor Daniel Kleinberger, I spent some time looking at how statutes and judicial decisions have defined the closely held corporation for purposes of offering oppression-related relief. I wrote up some of my preliminary findings below, which you may (or may not) find interesting. This is just a draft, so please excuse any errors:
The cause of action for oppression is designed to provide relief to minority shareholders in closely held corporations. That said, jurisdictions differ in how they define the corporations that are subject to the oppression action, which in turn creates differences in the shareholders who are eligible for oppression-related protection.
In jurisdictions with dissolution-for-oppression statutes, some provide no limitation on the types of corporations that fall within the statutory coverage. As literally written, in other words, these statutes extend the protection of the oppression doctrine to shareholders in any corporation—whether closely held or not. In other jurisdictions, the statutory coverage is limited to corporations with shares that are not publicly traded. These statutes seem more directly tailored to the shareholders that the oppression doctrine was designed to protect—i.e., shareholders in corporations that lack a market exit at a fair price.
Some statutes focus more on the number of shareholders in the company. New Jersey, for example, provides an oppression action only for corporations with 25 or fewer shareholders. Others set forth a more generally applicable oppression action, but then provide additional oppression-related grounds to corporations with less than a specified number of owners. Still other statutes link the oppression action to “statutory close corporations”—i.e., corporations that qualify and elect to use the jurisdiction’s supplemental statutory provisions for closely held corporations. Georgia, for example, provides an oppression action only for statutory close corporations. In other states, the statutes set forth a more generally applicable oppression action, but then provide additional oppression-related grounds (or remedies) for statutory close corporations.
In jurisdictions following a fiduciary duty approach, there are relatively few decisions that attempt to define a closely held corporation for the purpose of determining whether the oppression doctrine should apply. In Donahue v. Rodd Electrotype Co., the Supreme Judicial Court of Massachusetts imposed a fiduciary duty between shareholders of a “close corporation.” The court also defined “close corporation” as follows:
In previous opinions, we have alluded to the distinctive nature of the close corporation, but have never defined precisely what is meant by a close corporation. There is no single, generally accepted definition. Some commentators emphasize an “integration of ownership and management,” in which the stockholders occupy most management positions. Others focus on the number of stockholders and the nature of the market for the stock. In this view, close corporations have few stockholders; there is little market for corporate stock. The Supreme Court of Illinois adopted this latter view in Galler v. Galler, 32 Ill.2d 16, 203 N.E.2d 577 (1965): “For our purposes, a close corporation is one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling.” We accept aspects of both definitions. We deem a close corporation to the typified by: (1) a small number of stockholders; (2) no ready market for the corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.
While it is true that closely held corporations typically have a small number of shareholders and substantial shareholder participation in management, it is widely believed that the lack of exit rights is the primary cause of the oppression problem and the need for judicial oversight. Thus, most courts that use a shareholder-to-shareholder fiduciary duty to police oppressive conduct would likely consider the lack of a market for the corporation’s shares to be the determinative factor in whether the corporation is subject to the oppression doctrine. As one authority observed:
. . . [T]he term “close corporation” means a corporation whose shares are not generally traded in the securities markets even if ownership and management do not completely coalesce. This definition seems to be most nearly in accord with the linguistic usages of the legal profession. For instance, lawyers do not commonly exclude a corporation from the category of close corporations solely because some of its shareholders are not active in management.
 The Arkansas dissolution-for-oppression statute, for example, states simply that a court “may dissolve a corporation . . . [i]n a proceeding by a shareholder, if it is established that . . . the directors or those in control of the corporation have acted, are acting, or will act in a manner that is . . . oppressive . . . .” Ark. Code § 4-27-1430(2)(ii). The statute does not limit the term “corporation” in any manner. Accord Haw. Rev. Stat. § 414-411(2)(B); Tenn. Code § 48-24-301(2)(B); Utah Code § 16-10a-1430(2)(b).
 See, e.g., Mich. Comp. Laws § 450.1489 (providing that “[a] shareholder may bring an action . . . to establish that the acts of the directors or those in control of the corporation are . . . willfully unfair and oppressive to the corporation or to the shareholder,” but stating that “[n]o action under this section shall be brought by a shareholder whose shares are listed on a national securities exchange or regularly traded in a market maintained by 1 or more members of a national or affiliated securities association”); N.Y. Bus. Corp. Law § 1104-a (allowing shareholders who own twenty percent or more of the company and who are entitled to vote for directors to petition for dissolution on the grounds of “oppressive actions” so long as the corporation is not “registered as an investment company” and has “no shares . . . listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association”); see also La. Rev. Stat. § 12:1-1435 (providing that “[i]f a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder's shares at their fair value,” but stating that “[t]his Section shall not apply in the case of a corporation that, on the effective date of the withdrawal notice . . . has shares that are covered securities under Section 18(b)(1)(A) or (B) of the Securities Act of 1933, as amended.”).
Before 2006, the dissolution-for-oppression provision of the Model Business Corporation Act provided no limitation on the types of corporations that fell within its statutory coverage. See Model Bus. Corp. Act § 14.30(a)(2) (2005). In 2006, however, the provision was made unavailable to corporations with shares that are:
(i) a covered security under section 18(b)(1)(A) or (B) of the Securities Act of 1933; or
(ii) not a covered security, but are held by at least 300 shareholders and the shares outstanding have a market value of at least $20 million (exclusive of the value of such shares held by the corporation’s subsidiaries, senior executives, directors and beneficial shareholders and voting trust beneficial owners owning more than 10% of such shares).
Id. § 14.30(b) (2006). This 2006 amendment seems designed to limit the oppression action to corporations lacking a market exit at a fair price. Indeed, comment 2 to the present § 14.30 states that “[s]hareholders of corporations that meet the tests of section 14.30(b) may often have the ability to sell their shares if they are dissatisfied with current management.” See also Miss. Code § 79-4-14.30 (substantially the same as the Model Act).
 See N.J. Stat. § 14A:12-7(1)(c).
 See, e.g., Alaska Stat. § 10.06.628 (allowing “a shareholder or shareholders who hold shares representing not less than 33 ⅓ percent of the total number of outstanding shares” to petition for dissolution on various grounds, including “persistent unfairness toward shareholders” and “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder,” but stating that the latter ground is only available in corporations with 35 or fewer shareholders); Cal. Corp. Code §§ 158, 1800 (substantially the same).
The Minnesota dissolution-for-oppression statute allows a shareholder to bring an action when “the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation.” Minn. Stat. § 302A.751. “Publicly held corporation” is defined as “a corporation that has a class of equity securities registered pursuant to section 12, or is subject to section 15(d), of the Securities Exchange Act of 1934.” Id. § 302A.011 subd. 40. Closely held corporation is defined as “a corporation which does not have more than 35 shareholders.” Id. § 302A.011 subd. 6a. Thus, allegations of oppressive conduct against a shareholder in his capacity as a shareholder or director may be asserted in any Minnesota corporation that lacks publicly traded shares. If the allegations of oppressive conduct are against a shareholder in his capacity as an officer or employee, however, the corporation cannot have more than 35 shareholders.
 To “qualify,” a corporation generally must have less than the maximum number of shareholders prescribed by the statute, and to “elect,” a corporation typically must include a statement in its articles that designates itself as a close corporation. See, e.g., Del. Code tit. 8, §§ 342-344 (30 or fewer shareholders); Ga. Code § 14-2-902 (failing to provide a limit on the number of shareholders for new companies electing to be statutory close corporations, but providing a 50-shareholder maximum for existing companies electing this status).
 See, e.g., Ga. Code § 14-2-940(a)(1).
 See, e.g., Wyo. Stat. § 17-16-1430(b) (stating that any corporation may be dissolved on the grounds that “[t]he directors or those in control of the corporation have acted, are acting, or will act in a manner that is . . . oppressive . . .”); id. § 17-17-140(a) (stating that a shareholder of a statutory close corporation may petition the court for dissolution or alternative relief on the grounds that “[t]he directors or those in control of the corporation have acted, are acting, or will act in a manner that is . . . oppressive . . . or unfairly prejudicial to the petitioner, whether in his capacity as shareholder, director or officer of the corporation”). Other states following this pattern include Missouri, Montana, and Wisconsin. See Mo. Stat. §§ 351.494(2)(b), 351.850-.865; Mont. Code §§ 35-1-938(2)(b), 35-9-501 to -504; Wis. Stat. §§ 180.1430(2)(b), 180.1833.
 See supra notes XX and accompanying text.
 Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 511 (Mass. 1975) (citations omitted).
 See supra note XX.
 1 Close Corporations, supra note XX, § 1:3.