The Law Office of Alan Pritchard, PLLC
Attorney at Law · 901-249-8748
Practice Areas Business and Commercial Disputes Breach of Contract Cases Commercial Debt Collection Construction Law/Mechanics' & Materialmens' Liens Landlord/Tenant Law Closely Held or Family Owned Corporations and Shareholders Rights Rule 31 Listed Mediator Fair Debt Collection Practices Act Counseling and Litigation

Closely Held or Family Owned Corporations and Shareholders Rights

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Although officers and directors within closely held corporations typically act in good faith towards their shareholders, operating in the best interests of the corporation, even the most prudent and well intentioned officers and directors may act in a way that breaches their duty of care owed to shareholders.  A person challenging the decisions made by these officers and directors has a heavy burden of showing lack of good faith and due deliberation.  Therefore, it is important for both majority and minority shareholders to understand their rights, to understand what conduct can be categorized as "oppressive," and if oppressive conduct can be found, to know what can be done about it. 

Tennessee law holds that officers and directors must not engage in "oppressive conduct," which is defined as "conduct whereby the majority attempts to freeze or squeeze the minority shareholder(s) out of business, depriving the minority of its right to participate in the management of the corporation and/or their right to benefit financially in the form of reasonable compensation or dividends."  Cochran v. L.V.R. & R.C., Inc., 2005 Tenn. App. LEXIS 581, at *14 (Tenn. Ct. App. 2005).Oppressive conduct includes conduct in which the controlling shareholders or directors do not declare dividends and instead provide themselves with high compensation.  Id. at *15.

Although a finding of oppressive conduct does not require a finding of illegal or fraudulent acts, "it does require a finding of more than merely poor business judgment on the part of the controlling shareholders."Id. at *16 (citing Balvik v. Sylvester, 411 N.W.2d 383, 387 (N.D. 1987)).  To determine whether there has been oppressive conduct, the court must look at all the facts and examine the reasonable expectations of the complaining shareholders.  The actions of the majority are measured in terms of their fiduciary duties and in light of the totality of the circumstances.  Id.

If "illegal, oppressive, or fraudulent" conduct is found, Tennessee law provides for involuntary judicial dissolution of the close corporation by its shareholders.  T.C.A. § 48-24-301(2)(B).  As dissolution is a "drastic remedy," courts have discretion to fashion other less permanent equitable remedies.  These remedies include:dissolution of the corporation at a later date, an appointment of a receiver, an ordering of accounting, an injunction prohibiting oppressive conduct, a declaration of dividends, or an award of damages to oppressed stockholders.  Id. at *17-18 (citing Baker v. Commercial Body Builders, Inc., 507 P.2d 387at 395-396 (Or. 1973)).

Thus, although the decisions of officers and directors of a closely held corporation are generally protected by the business judgment rule, these decisions will be reexamined by the courts if there is a showing of oppression or bad faith.  Tennessee law now allows for a wide range of remedies for the oppressed shareholder beyond dissolution of the corporation, which may provide these shareholders with relief without destroying the corporation.  Mr. Pritchard and Ms. Bible have the experience necessary to aid you, whether you are a majority shareholder who has been accused of oppression or a shareholder that has been oppressed.  They will analyze your case, determine whether you may recover for the injury done to you, and recommend a course of action.