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Shareholder Oppression in Delaware

Posted by Attorney Stephen Hance | Feb 03, 2015 | 0 Comments

Many closely-held companies that operate out of Minnesota (and every other state) are actually chartered under Delaware law. Unlike in Minnesota, Delaware does not have a statute that directly addresses shareholder oppression issues. Organizing under Delaware law is seen as advantageous to companies for limiting shareholder oppression claims. We are frequently approached about shareholder issues for Delaware companies.

Despite not having the same statutory rights as shareholders of Minnesota companies, Delaware has extensive caselaw on most shareholder issues. Shareholder claims in closely-held Delaware companies typically derive from breach of fiduciary duties by controlling shareholders. Controlling shareholders of Delaware companies directly owe the other shareholders fiduciary duties of loyalty and care. It should be noted that the shareholders or members in the case of an LLC may agree to restrict or eliminate those duties in the chartering documents of the company.

There are basically three judicial standards that apply to evaluating a breach of fiduciary duty claim brought by a minority shareholder or member under Delaware law. The first is the so-called “business judgment standard.” Unless circumstances call for applying a different standard, courts apply this standard, which is essentially a presumption that the controlling shareholders made an educated decision in good faith and in the best interests of the company. In these cases, the courts will not question decisions of the board or majority if it arguably derives from any rational business purpose.

There are certain cases that call for a higher “enhanced scrutiny” standard where hostilities or circumstances could undermine the objectivity of controlling shareholders or directors. In those cases, courts require the defendants to prove that their motivations were proper and their actions were reasonable.

Finally, in some situations such as where the controlling directors or shareholders had a personal interest in the decision, courts apply the “entire fairness” standard. In those cases, courts look at the transactions or dealings at issue and evaluate whether the actions were generally fair to the involved shareholders.

Shareholders or members of Delaware companies dealing with oppression including freeze-out or squeeze-out situations have rights, but unlike in Minnesota, the circumstances need to be evaluated in light of fiduciary duty law in Delaware to determine whether they might reasonably be able to expect judicial relief.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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