If a majority shareholder terminates a minority shareholder’s employment or forces him to sell his shares in the company at a below-market price, the majority shareholder could be vulnerable to a claim of oppression. But, what happens if the majority shareholder is able to obtain a signed agreement from the minority shareholder in which the minority surrenders his rights in return for some – but far less than fair market – consideration? Typically, an agreement giving the minority shareholder some severance rights or compensation for his shares will contain a general release provision, which would provide that the minority shareholder releases all claims he may have against the majority shareholder.
Often the minority shareholder – having lost his job and means of support or being compelled to sell his interest in his business – will be under significant pressure to accept an offer that provides him some continuing income or compensation – even if it is much less than what he might legally be entitled to or could negotiate for is he were not under duress.
Can the minority shareholder still bring an oppression claim where he has signed a release in favor of the majority shareholder?
There does not seem to be much case law directly on point, but by looking at cases where courts have had to address claims that releases or other contracts were executed under economic duress, we may find some guidance in answering this question:
There are a number of formulations of what constitutes “economic duress.”
To show economic duress (1) a party "must show that he has been the victim of a wrongful or unlawful act or threat, and (2) such act or threat must be one which deprives the victim of his unfettered will." "As a direct result of these elements, the party threatened must be compelled to make a disproportionate exchange of values. Amplifying the latter factor, i.e., that the circumstances must have been caused by the opposite party, the mere taking advantage of financial difficulty is not duress, unless the party taking advantage contributed to or caused that financial difficulty. The more disproportionate the exchange, the more likely the claim will be upheld.
Another formulation of the elements of economic duress is: (1) that one side involuntarily accepted the terms of another; (2) that circumstances permitted no other alternative; and (3) that these circumstances were the result of coercive acts of the opposite party.
Legal principles which may be applicable and vary by jurisdiction include:
- Unequal bargaining power based on comparative size and resources is a factor to be considered in determining whether the transaction involved duress.
- While representation by counsel may be a factor to be considered, it does not in itself bar a claim of duress.
- If a contract is entered into as a result of duress, the contract is not void but voidable, and could be ratified by conduct after the restraint was removed.
New York courts have held that a contract may be voided on the ground of economic duress where the complaining party was compelled to agree to its terms by means of a wrongful threat which precluded the exercise of its free will.
A “wrongful threat” is a threat to do something that the threatening party is under a legal duty not to do. Although the objectionable acts need not be criminal or illegal, they "must involve an act or a threat of action from which the person sought to be influenced is entitled to be free." Assertions that a "party knew about and used . . . [the other party's] poor financial condition to obtain an advantage," "even when coupled with inequality" in negotiating position and "vigorous bargaining tactics" will not alone constitute duress. Nor can a party "be guilty of economic duress for refusing to do that which he or she is not legally required to do."
Deceptive or high pressure tactics or overtly coercive, manipulative or threatening statements can also serve as a basis for a claim of duress.
Shareholder oppression, in the context of the example outlined above, appears to fit nicely within the definition of economic duress, since the minority has been forced to make a disproportionate exchange of values by the majority shareholder.
Further, the majority shareholder does have certain legally recognized fiduciary duties to the minority, and a threat to the minority that violates those duties would be wrongful.
Thus, if a majority shareholder acts oppressively by terminating the minority’s employment or forcing him to sell his shares, this can constitute sufficient evidence of duress to enable the revocation of a release that is given.
It should not be surprising that some courts equate duress with oppressive conduct; for example: “The assertion of duress must be proved by evidence that the duress resulted from defendant's wrongful and oppressive conduct and not by plaintiff's necessities.”
Anyone contemplating a duress argument must be aware of a number of potential defenses which the other side may seek to assert. These include that:
- The alleged duress was self-imposed and could have been avoided. In other words, the party claiming duress did have alternatives to signing or could have taken steps to protect his interests.
- The party claiming duress acted of its own free will and had the ability to evaluate the consequences of signing. This would include having advice of counsel or the ability to negotiate terms.
- The party claiming duress waited too long to seek to void the release. The concern here is that parties not get “two bites at the apple,” by take the deal that is on the table and them suing to see if he can get more.
- The party claiming duress affirmed the release by accepting benefits thereunder.
Thus, the issues relating to whether the release will be enforced may depend on the particular facts of the case, and which legal arguments are applicable to those facts.