Oppression of Minority Shareholders
O'Neals Oppression of Minority Shareholders: Protecting Minority Rights in Squeeze-Outs and Other Intracorporate Conflicts
Second Edition
by F. Hodge O'Neal and Robert B. Thompson
Published by West Group - Clark Boardman Callaghan
Table of Contents
VOLUME 1
Chapter 1 - Scope of Book Objectives and Preliminary Considerations
- Section 1:01 Scope of Book.
Section 1:02 The traditional corporate control pattern
Section 1:03 Losses and injustices to squeezees.
Section 1:04 Losses to the economy.
Section 1:05 Objectives of book.
Chapter 2 - Underlying Causes of Squeeze-Outs
- Section 2:01 Scope of chapter.
Section 2:02 Greed and desire for power; personality clashes, marital discord, and
family quarrels; basic conflicts of interest and disagreements over policy.
Section 2:03 The inactive shareholder.
Section 2:04 Death of founder or other key shareholder
Section 2:05 The problem of the aged founder who "hangs on".
Section 2:06 Drive of superior talent to rise.
Section 2:07 The autocratic controlling shareholder; acquiescence by some
shareholders in assumption of special privileges by others.
Section 2:08 Disregard of corporate ritual and failure to keep proper records.
Section 2:09 View that corporation belongs to shareholder-employees.
Section 2:10 Viewing incorporated enterprise as a "partnership" or "family business".
Section 2:11 The obstreperous or uncooperative shareholder; the deteriorating
shareholder-employee; majority shareholders' view that they are justified
in eliminating a minority shareholder when personal relationships
deteriorate.
Section 2:12 Entry of minority shareholders into a competing business.
Section 2:13 Failure to provide properly for new inventions by inventor-shareholder.
Section 2:14 Issuance of small number of shares as qualifying shares or as incentive to
employees; gifts of shares to children.
Section 2:15 Difficulty of disposing of a minority interest in a close corporation.
Section 2:16 Difficulty of valuing a business interest.
Section 2:17 Failure to consider all ramifications of business bargain and reduce entire
bargain to writing.
Section 2:18 Undercaptialization of business.
Section 2:19 Failure to appreciate problems that might arise out of change in ownership
and control.
Section 2:20 Business participants' failure to obtain preventive legal services and
inability of many lawyers to supply preventive services.
Chapter 3 - Squeeze-Out Techniques: Withholding Dividends, Employment and Information; Contractual Arrangements; Appropriation of Corporate Assets and Opportunities
- Section 3:01 Scope of chapter.
Section 3:02 Squeeze techniques in general.
Section 3:03 Legal principles which obstruct relief.
Section 3:04 Dividend withholding - Variations in the setting and the technique.
Section 3:05 Remedies of the squeezee.
Section 3:06 Eliminating minority shareholders from directorate and excluding them
from company employment.
Section 3:07 Siphoning off earnings by high compensation to majority shareholders -
Description of the technique and its impact on minority shareholders.
Section 3:08 Remedies of the minority shareholder.
Section 3:09 Withholding information - in general.
Section 3:10 In buying out minority shareholders.
Section 3:11 Techniques utilized to prevent a minority shareholder from getting
information.
Section 3:12 Siphoning off corporate earnings by leases and loans favorable to
majority shareholders.
Section 3:13 Siphoning off a corporation's profits by having other enterprises perform
services for it.
Section 3:14 Siphoning off earnings by other contractual arrangements; failure to
enforce contracts for benefit of corporation.
Section 3:15 Fraudulent or unfair contracts; squeezee's remedies.
Section 3:16 Corporation's purchase of shares from majority shareholder at high price.
Section 3:17 Appropriation of corporate assets, contracts, or credit for personal use.
Section 3:18 Usurping corporate opportunities.
Section 3:19 Transactions between a parent corporation and partly owned subsidiary.
Section 3:20 Dilution of minority shareholders' interests through issuance of stock.
Chapter 4 - Squeeze-Out Techniques: Sale of Control and Related Techniques
- Section 4:01 Scope of chapter.
Section 4:02 Transactional settings for control premiums.
Section 4:03 Traditional legal doctrine; theories about control premiums.
Section 4:04 Misrepresentations, omissions and fraud.
Section 4:05 Looting cases.
Section 4:06 Sale of office.
Section 4:07 Control premiums as breach of fiduciary duty.
Section 4:08 Control premiums in control share statues and other contexts.
Chapter 5 - Squeeze-Out Techniques: Fundamental Corporate Changes
A. Introduction
- Section 5:01 Scope of chapter.
Section 5:02 Procedures for effectuating fundamental corporate changes; susceptibility
to use in squeeze plays.
Section 5:03 Historical trend of statutory and judicial developments on use of
fundamental corporate changes to accomplish squeeze-outs.
B. Specific Examples of Fundamental Corporate Changes Susceptible to Use in
Squeeze Plays: Mergers and Related Transactions
- Section 5:04 Squeeze-outs through mergers.
Section 5:05 Eliminating minority shareholders by short form mergers; use of short form
merger by individual majority shareholder.
Section 5:06 Merger variations: triangular mergers and reverse triangular mergers used
to avoid shareholder vote or dissenters' rights or to squeeze out minority.
Section 5:07 Compulsory share exchange.
Section 5:08 Mergers used to avoid "first option" rights, redemption obligations or to
terminate derivative suits.
Section 5:09 Mergers in limited liability companies.
C. Specific Examples: Changing Share Rights Through Charter Amendment or
Otherwise
- Section 5:10 Charter or bylaw amendment -- A squeeze technique.
Section 5:11 Reverse stock split.
Section 5:12 Making shares redeemable.
Section 5:13 Alteration or destruction of preferences or other rights of preferred
shareholders.
Section 5:14 Dual class recapitalization.
D. Specific Examples: Sale of Assets and/or Dissolution
- Section 5:15 Sale of corporate business, franchise and assets.
Section 5:16 Sale of assets at an inadequate price or in circumstances oppressive to
minority shareholders; dissenters' remedies.
Section 5:17 Sale of assets to circumvent minority power to veto desired corporate
action or avoid a buy-sell agreement.
Section 5:18 Sale of assets to set stage for oppression of minority.
Section 5:19 Splitting off the profitable part of business and transferring it to majority of
shareholders.
Section 5:20 Mortgage of all corporate assets.
Section 5:21 Dissolution.
Section 5:22 Inadequacy of value of proportionate part of corporation's physical
assets as payment for objecting shareholder's interest in dissolved
corporation.
E. Miscellaneous Methods; Categories
- Section 5:23 Obtaining amendment of the corporation statute or enactment of special
statue ot facilitate squeeze-out.
Section 5:24 Creation of a subsidiary or a holding company as a maneuver in a
squeeze play; possibility of transferring business to a holding company in
a state where the climate is more favorable to a squeeze out.
Section 5:25 Use of bankruptcy or other creditor proceedings to eliminate minority
shareholders; intentional destruction of business; purchase and
enforcement of claim against corporation.
Section 5:26 Tender offers as part of a squeeze-out.
Section 5:27 "Going private."
F. Remedies for Minority Shareholders Against Fundamental Corporate Changes
- Section 5:28 Overview of remedies afforded minority shareholders in fundamental corporate
changes.
Section 5:29 Appraisal rights; Limitations on the effectiveness of dissenters' statutory right to
have shares purchased.
Section 5:30 Fundamental corporate changes which avoid dissenters' rights; the
doctrine of de facto merger.
Section 5:31 Costs and procedural difficulties associated with appraisal.
Section 5.32 Valuation in appraisal statutes.
Section 5:33 Dissenters' rights to sue for breach of fiduciary duty; the extent to which
dissenters' right to have their shares purchased is the exclusive remedy.
Section 5.34 Relation to other remedies.
Section 5.35 Disclosure obligations under state law.
Section 5:36 Attacks on mergers or other shareholder action as violative of federal
law: Proxy regulation.
Section 5:37 SEC Rule 10b-5.
Section 5:38 The registration provisions of the Securities Act of 1933.
Section 5:39 Going Private Regulations.
VOLUME 2
Chapter 6 - Miscellaneous Squeeze-Out Techniques
- Section 6:01 Scope of chapter.
Section 6:02 Maneuvers related to corporate meetings; failure to hold meetings.
Section 6:03 Eliminating or circumventing cumulative voting.
Section 6:04 Manipulations of stock transfer restrictions.
Section 6:05 Removal or imposition of stock transfer restrictions.
Section 6:06 Refusal of young shareholders to adjust periodically the transfer price of
shares subject to a survivor-purchase agreement.
Section 6:07 Possibilities of squeeze plays under subchapter S.
Section 6:08 Using legal processes as a squeeze technique.
Section 6:09 Other squeeze-out techniques; miscellaneous oppressive practices.
Section 6:10 Squeeze-outs of majorities by minorities.
Chapter 7 - Resisting Squeeze-Outs and Oppression
A. Introduction
- Section 7:01 Scope of chapter.
Section 7:02 Changes in statutory and judicial views of the role of shareholders,
particularly in close corporations.
B. Remedies Based on Fiduciary Duty
- Section 7:03 Fiduciary obligations of officers, directors, or controlling shareholders as
the basis for relief.
Section 7:04 Enhanced or modified fiduciary duties in close corporations.
Section 7:05 Analogizing a close corporation to a partnership; asserting that a
partnership or joint venture relationship survives incorporation.
Section 7:06 Asserting that corporation is a company founded on a personal
relationship.
Section 7:07 Direct vs. derivative suits.
Section 7:08 Distinguishing direct from derivative claims; a minority shareholder's
individual action for oppression.
Section 7:09 Direct recovery in derivative suits
C. Remedies Based on Dissolution or Alternative Relief.
- Section 7:10 Nonstatutory dissolution.
Section 7:11 Relief based on deadlock.
Section 7:12 Relief based on misconduct by those in control of the corporation.
Section 7:13 Relief based on oppression.
Section 7:14 Relief based on protecting the interest of minority shareholders.
Section 7:15 Relief based on reasonable expectations.
Section 7:16 Reasonable expectations: role of plaintiff's conduct.
Section 7:17 Corporations to which a reasonable expectations standard should be
applicable.
Section 7:18 Remedies: dissolution; appointment of a receiver.
Section 7:19 Buyout at the choice of the corporation or majority shareholder.
Section 7:20 Judicially ordered buyout.
Section 7:21 Fair value.
Section 7:22 Custodian.
Section 7:23 Provisional director.
Section 7:24 Judicial ordering of other corporate action or any equitable relief.
Section 7:25 Effect of shareholders' agreement on judicial remedies.
Section 7:26 Relationship of legislative and judicial remedies.
D. Other Remedies
- Section 7:28 Utilizing rights available under federal securities laws.
Section 7:29 Utilizing rights available state securities laws.
Section 7:30 Combining federal and state claims in one action; pendent jurisdiction;
bringing a class action.
Section 7:31 Expanding the number of defendants: broadened concepts of primary
liability; secondary liability; agency and tort principles; alter ego and
piercing the corporate veil; conspiracy doctrines.
Section 7:32 Preserving rights; avoiding waiver, laches and acquiescence.
Section 7:33 Miscellaneous tactics and maneuvers.
Section 7:34 Prelitigation investigation sources.
Section 7:35 Utilizing shareholder's right to inspect corporate books and records and
to make on-premises inspections.
Section 7:36 Utilizing director's right to inspect corporate books and records and to
make on-premises inspections.
Section 7:37 Getting information and assistance from administrative agencies.
Section 7:38 Discovery; challenging claims of attorney-client or accountant-client
privilege.
Section 7:39 -- The attorney-client privilege generally.
Section 7:40 -- The attorney-client privilege in an intracorporate setting.
Section 7:41 -- Other limits to use of attorney-client privilege.
Section 7:42 Overcoming the work product doctrine.
Chapter 8 - Resisting Squeeze-Outs and Oppression: Remedies Under Federal Law
A. Introduction
- Section 8:01 Remedies under federal securities laws; scope of chapter.
B. Rule 10b-5: Jurisdictional and Policy Limits
- Section 8:02 Language of Section 10(b) and Rule 10b-5.
Section 8:03 Interstate commerce.
Section 8:04 Definition of "any security".
Section 8:05 Purchase or sale.
Section 8:06 In connection with.
Section 8:07 Private causes of action.
Section 8:08 Standing.
Section 8:09 Swings in the pendulum.
C. Rule 10b-5: Elements of the Prohibited Act; Measure of Recovery
- Section 8:10 Statutory and common-law sources.
Section 8:11 Misrepresentation, omission and duty to disclose.
Section 8:12 Materiality.
Section 8:13 Fact.
Section 8:14 Scienter.
Section 8:15 Reliance and causation.
Section 8:16 Measure of recovery.
D. Rule 10b-5: Types of Squeeze-Out or Oppression Transactions Covered Under Rule 10b-5
- Section 8:17 Shareholders selling shares to controlling shareholders.
Section 8:18 Mergers.
Section 8:19 Mismanagement.
E. Federal Laws: Miscellaneous
- Section 8:20 Rule 10b- proceedings compared to proceedings under state law..
Section 8:21 Expanding the number of defendants: broadened concepts of primary
liability; secondary liability; securities laws provision on "controlling
person"' and conspiracy doctrines.
Section 8:22 Age Discrimination in Employment Act ("ADEA").
Chapter 9 - Arrangements Which Avoid Squeeze-Outs and Oppression
- Section 9:01 Scope of chapter.
Section 9:02 Separate attorney for each participant.
Section 9:03 Buy-out arrangements.
Section 9:04 Arrangements for settling disputes.
Section 9:05 Shareholders' agreements.
Section 9:06 Provisions requiring the declaration of dividends.
Section 9:07 Long-term employment contracts between shareholder and corporation.
Section 9:08 Charter or bylaw provision requiring high vote for shareholder and
director action.
Section 9:09 Cautions in using high vote requirements.
Section 9:10 Providing a veto by tailoring the corporations' share structure.
Section 9:11 Providing a veto over officer action.
Section 9:12 Special charter and bylaw provisions.
Section 9:13 Protecting preferred shareholders.
Section 9:14 Precaution when incorporating a partnership.
Chapter 10 - Idea Guide for Changes in Legal Control
- Section 10:01 Scope of chapter.
Section 10:02 Need for legal protection of contractual arrangements designed to
prevent minority oppression.
Section 10:03 Need for legal protection of minority shareholders who fail to obtain
protective contractual arrangements.
Section 10:04 Need for judicial discrimination in applying the business judgment rule;
direct versus derivative suits and fiduciary duties.
Section 10:05 Legislative broadening of grounds for corporate dissolution.
Section 10:06 Legislative alternatives to dissolution as a remedy for shareholder
dissension.
Section 10:07 Need for innovative or resourceful remedies developed by some courts.
Section 10:98 Mandatory statutory remedies such as dividends or buyouts.
Section 10:09 Statutory modifications regarding fundamental corporate changes.
Section 10:10 Changing appraisal statues.
Section 10:11 British devices for protecting minority shareholders.
Section 10:12 Modifications to British remedies.
Section 10:13 Oppression remedies in other jurisdictions.
Section 10:14 Miscellaneous proposals: Requiring corporate officials to supply
information to minority shareholders; administrative agencies to protect
minority interests.
