What is Shareholder Oppression?

The “shareholder oppression” doctrine is a set of legal principles that protect minority shareholders from abuse by the majority.  As such, these principles stand in direct contradiction to the central rule of corporate decision making that the will of the majority governs.  The doctrine also runs contrary to and can prevail over several other well established legal principles, including the business judgment rule, the employment at will doctrine and derivative claims distinction.  More on these later.

The principles protecting the rights of minority equity owners are articulated and implemented differently from state to state, and their implementation often involves a balancing of the rights of the majority to control the business entity’s destiny and the rights of the minority to receive the often unarticulated benefits they anticipated when they joined the enterprise.  The rules may vary within a state depending on the type of entity, as well. 

Some states, such as New Jersey, have statues protecting shareholders against oppressive acts.  Some, including New York, have developed case law remedies for oppression, and some, such as Delaware, do not recognize the oppression doctrine altogether, but rather protect minority rights through the application of other legal principles.

The definition of oppression also varies from State to State. New Jersey defines oppressive conduct as that which frustrates the “reasonable expectations” of the minority.

To determine whether an act or series of acts is oppressive requires a determination as to (a) what the minority’s expectations were at the outset of the venture, (b) and whether these expectations were reasonable, and (c) whether the particular act or acts in question would frustrate those expectations.

Thus, if a minority equity owner in a business entity had a reasonable expectation that he would be employed by the company, firing him would frustrate his reasonable expectation of employment.  That reasonable expectation of employment might have come with some qualifications, so that it might not extend to situations where he did something improper or where he proved incapable of performing the job.  These are fact issues which the Court would need to decide.

In future posts, we will look at the state of shareholder oppression and minority shareholder protection laws of several States to illustrate the restraints on majority shareholder action in these jurisdictions.