Reasonable Expectations of Shareholder
Should you find yourself or others becoming frustrated with a minority ownership interest in a small corporation or family business that is financially able to provide you a return on your investment but is not providing that return, you may want to consider contacting a corporate dispute attorney and inquiring how best to protect your rights. This area of Iowa law is complex.
On June 14, 2013, the Iowa Supreme Court published its opinion in John R. Baur vs. Baur Farms, Inc. and Robert F. Baur, (No. 11-0601) (June 14, 2013). Baur Inc. was a family farm corporation. A minority shareholder in the family corporation, John Baur, sued the corporation and its majority shareholder because as the minority shareholder claimed the majority shareholder engaged in “oppressive acts” by failing to buy his shares in the corporation at a fair price and as set forth within the corporation's governing documents. The minority shareholder requested the court fashion relief by either dissolving the corporation (i.e. terminate and end the corporation) or pay him (the majority shareholder) fair value of his ownership interest.
What is shareholder “oppression” in Iowa? The Court determined that the Iowa's Business Corporations Act (IBCA) “offers no definition of ‘oppressive' or ‘oppression,' and that “the Model Business Corporation Act, ” failed to define "opprssive" for claims dealing with a minority shareholders claims.:
1. “Some Courts have concluded oppression is ‘burdensome, harsh and wrongful conduct … or a visible departure from the standards of fair dealing and a violation of fair play on which every shareholder who entrusts his money to a corporation is entitled to rely'.”
2. “Other courts have linked oppression to the derogation of the fiduciary duty ‘of utmost good faith and loyalty' owed by shareholders to each other in close corporations.”
3. “A third approach, now perhaps the most widely adopted, links oppression to the frustration of the reasonable expectations of the corporation's shareholders.”
After citing several cases applying each oppression “standard” above, and after finding the “reasonable expectations” standard is the “most widely adopted,” the Iowa Supreme Court applied the reasonable expectations standard for shareholder oppression..
This highlights that the Court was adopting a bright-line rule in Iowa for minority shareholder oppression. The Court did not identify each and every act that would amount to oppression. Indeed, the Court opined that it “need not catalogue … all the categories of conduct and circumstances that will constitute oppression frustrating the reasonable expectations of minority shareholders' interests.” Yet he Court did conclude:
We hold that majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder's repeated offers to sell share for fair value.
Should you find yourself or others becoming frustrated with a minority ownership interest in a small corporation or family business that is financially able to provide you a return on your investment but is not providing that return, you may want to consider contacting a corporate dispute attorney and inquiring how best to protect your rights.