In North Dakota, shareholders (or members) of closely held corporations (or llcs) owe each other a fiduciary duty of utmost loyalty and good faith. See Schumacher v. Schumacher, 469 N.W.2d 793, 797 (N.D. 1991). The duty protects shareholders from oppressive or unfair tactics by other shareholders. Breach of this duty gives rise to a breach of fiduciary duty claim by the aggrieved shareholder(s).
North Dakota statutes also provide that when the “reasonable expectations” of a shareholder have been frustrated, the oppressed shareholder may be entitled to “equitable remedies.” See NDCC 10-19.1. In the absence of a written agreement, shareholder reasonable expectations are ascertained by determining the understanding objectively reasonable shareholders would have reached when the venture began. Often it takes a trial for a Court to make this determination. Commonly, shareholders reasonably expect continued employment in connection with their ownership interest in a company. Shareholders also typically expect a say in management, a proportionate share of compensation or profits, transparency, etc.
Courts have the power and discretion in a shareholder dispute to award equitable remedies where warranted to redress oppressive conduct. North Dakota courts therefore, may order monetary damages, dissolution, shareholder buyout, order an accounting, award attorney's fees, grant injunctive relief, or fashion any other custom remedy warranted by the facts.
In our experience, for profitable businesses, the most common type of remedy is a court-ordered buyout based on the value of the selling shareholder's proportionate stake in the company. This is because Courts are often reluctant to force combative shareholders to remain business partners. This too can be a significant source of contention among the parties to a lawsuit though. The value of a company as an ongoing business is not nearly as certain as the cost of goods on an open market. There is no ready market for shares in a privately held business and any number of variables can influence value from day to day.
Parties often hire value experts at substantial expense who may serve as witnesses at trial and sometimes even the Court appoints a value expert where there is a wide disparity among the parties.
As reflected in this summary, under North Dakota law, shareholders of privately held companies have substantial rights in Court if they are oppressed. It is equally clear however, that such claims are complex and require experience and familiarity with the laws.
At Hance Law Firm, Ltd., we focus on this type of dispute and we welcome your inquiry. Our initial consultation is always free.