For almost 30 years, minority shareholders in North Carolina have sought relief from corporate oppression via so-called Meiselman actions. An important Business Court opinion released Tuesday discusses the limits of Meiselman claims, which will be less appropriate the larger the number of shareholders and the greater the corporate governance in operation.
In the Meiselman case itself, the Supreme Court permitted minority shareholders in closely-held corporations to seek judicial relief to enforce those shareholders' reasonable expectations, such as employment or participation in management. Meiselman characterized closely-held corporations as "little more than 'incorporated partnerships,'" often formed due to family or friend relationships, in which the minority shareholders are not practically able to bargain for protection (or to recognize the need for protection) when the corporation is formed. Meiselman involved seven such corporations -- all part of a family business formed by the father of the two brothers who found themselves on opposite sides of the lawsuit.
The Business Court decision confronted a different situation, and those differences determined a different outcome. In High Point Bank & Trust Co. v. Sapona Mfg. Co., at issue were the plaintiff's rights as minority shareholder of three corporations. Although the corporations originated as family businesses -- the youngest of which was over 75 years old -- the shareholder and employee base had expanded significantly over time. Acme-McCrary, a hosiery manufacturer, now has 81 shareholders and 892 employees; Sapona, a yarn processor, now has 51 shareholders and 200 employees; Randolph Oil, a petroleum wholesaler and convenience store owner, now has 25 shareholders and 49 employees. The shares of these corporations were unmarketable and functionally locked the shareholders into ownership absent some company action. Two of the three corporations had issued tender offers to their shareholders on one or two occasions in the last 20 years.
Following the death of the individual plaintiff, the daughter and granddaughter of the companies' founders, her executor asked the three companies to redeem her shares at a market value established by an appraisal that the executor commissioned. Each company's board of directors met and considered the request, but declined. The executor sued under a Meiselman theory, arguing that the companies' refusal to repurchase the shares was coercive and oppressive conduct leaving a minority shareholder without rights. The question for the Court was whether the right to have stock repurchased was an enforceable right or interest under Meiselman. If so, the corporations' refusal to repurchase rendered that right in need of protection.
Judge Tennille began his analysis by discussing the broad Meiselman remedies and the limitations on those remedies from more recent statutory amendments. Under the old N.C.G.S. § 55-125, a court had equitable discretion to fashion a number of remedies besides dissolution of the corporation -- remedies such as repurchase at fair value, altering corporate bylaws provisions, or prohibiting certain corporate actions. Section 55-14-30, the modern replacement, eliminates those alternative remedies. With liquidation as the only remedy, judicial dissolution required a "strong showing" because such a remedy conflicted with the business judgment rule and other traditional judicial deference to corporate governance.
The Court viewed this case as significantly different from Meiselman and the Court's own 1999 decision in Royals v. Piedmont Elec. Repair Co. (which found a right of redemption for a minority shareholder) for several reasons. First, there was no loss of ownership benefits here. Plaintiff was not denied an opportunity to work; the trust now holding her shares continued to receive the same benefits that she enjoyed while living; no assets were diverted; no excessive salaries were paid, but regular dividends were paid to all shareholders. The Court held that there was no mandatory right of redemption of stock in closely-held corporations. Such a right "would place the other shareholders in close corporations at financial risk upon the death of any shareholder."
Second, there was no personal or familial antagonism of the sort experienced in Meiselman. The plaintiff was never an employee or involved in management, and thus was not being deprived of such opportunities. The majority of shares in the three companies were owned by non-employees.
Third, there was no controlling shareholder and the shares were diffused to a much greater extent than in Meiselman. Each corporation observed corporate formalities. The majority of the companies' officers were not related to the founders. In short, these corporations were not the same as a corporation with three shareholders being run like a partnership.
The Court was not willing to create a bright-line number of shareholders that would remove a corporation from Meiselman analysis. Nevertheless, the more diffuse the ownership of a company, the more important "the number, composition, and rights and interests of the non-complaining shareholders" become. "Where, as here, there is no impediment to the majority of shareholders exercising their voting rights, the courts should not intervene on behalf of a minority shareholder."
Judge Tennille also held that the plaintiff had no reasonable expectation of a right of redemption. There was no written agreement establishing such a right. The limited activities of the corporations with a one-time tender offer and a one-time repurchase of the shares of a deceased shareholder were not sufficient to create a future right of redemption. Most importantly, there was no evidence that any shareholder other than the plaintiff or any officer or director had any notice of or expected that plaintiff would have such a right of redemption.
The expectation also was unrealistic on two grounds: first, that the redemption of plaintiff's minority interest would be at fair market value with no minority discount, and second, that the redemption would be personal to plaintiff. The latter, in particular, would have created "stiff fiduciary challenges" from the other shareholders. Although the plaintiff had some minimal evidence of oppression, "oppression is not the standard for determining rights and interests. It is applicable only when determining the need for protection."
Meiselman likewise requires consideration of the impact of the plaintiff's claim on other shareholders. Here, dissolution would impose stock value and tax losses on all of the other shareholders and displace hundreds of employees.
After High Point Bank & Trust, it would be an overstatement to declare Meiselman dead for corporations with more than a handful of shareholders. Nevertheless, the larger the shareholder base and the more significant the formal corporate governance, the less likely it is that a corporation will have created unwritten "expectations" for shareholders or that the corporation will face dissolution in the name of shareholder protection.
Full Order & Opinion