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Shareholder Oppression in Delware

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<html> <head> <title>Shareholder Oppression in Delware</title> </head> <body> <h1>Shareholder Oppression in Delware</h1> <div class="info">Author: <a href="http://www.goinglegal.com/author_1_283864.html">Samuel Goldman & Associates</a></div><div class="body">Delaware does not have a cause of action for oppression per se, but it does offer relief for minority shareholder oppression-like claims applying other legal principles. Thus, oppression-like claims must be carefully pleaded in Delaware. <br /> <br /> Since court's in other states are likely to apply Delaware law to oppression-like claims to companies organized in Delaware, vigilance must also be exercised in pleading claims relating to Delaware corporations in non-Delaware courts. Some courts outside of Delaware, such as the Southern District of New York and the Northern District of Illinois, have upheld causes of action for shareholder oppression under Delaware law, while others, such as the District of New Jersey, have dismissed oppression claims for failure to state a claim under Delaware law.<br /> <br /> Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), is a Delaware case that often cited for the proposition that Delaware does have a shareholder oppression remedy, and also for the proposition that it does not. The case states that "[t]he entire fairness test, correctly applied and articulated, is the proper judicial approach" to deciding claims brought by minority shareholders against those in control of the corporation. Thus, some conclude that oppression claims may be pursued under the entire fairness doctrine. <br /> <br /> However, Nixon v. Blackwell also, contains language that seems to indicate otherwise: <br /> <br /> A stockholder who bargains for stock in a closely-held corporation and who pays for those shares ... can make a business judgment whether to buy into such a minority position, and if so on what terms. One could bargain for definitive provisions of self-ordering permitted to a Delaware corporation through the certificate of incorporation or by-laws by reason of the provisions in [Delaware law, and] in addition to such mechanisms ... [such as] elaborate earnings tests, buy-out provisions, voting trusts, or other voting agreements. The tools of good corporate practice are designed to give a purchasing minority stockholder the opportunity to bargain for protection before parting with consideration.<br /> <br /> This lack of sympathy for minority shareholders who have not bargained for written protections of their rights fails to recognize that minority shareholders often find themselves in the minority due to factors they could not anticipate at the outset of the venture, and that even the best and most extensive shareholders' agreements cannot address all of the many varied and creative ways that the majority can use its power to unfairly harm the minority.<br /> <br /> Nevertheless, many of the claims falling under the general category of shareholders' oppression can be brought under Delaware law using other legal principles accepted in that State.<br /> <br /> The entire fairness doctrine, mentioned above, is one of these. It is an exception to the business judgment rule, which would ordinarily protect directors' actions from judicial scrutiny, and creates a framework for granting minority shareholders relief when directors act in their own self-interest. Thus, when a minority shareholder shows that directors stand on both sides of a transaction or will derive a special benefit from the transaction, i.e. there is a conflict of interest that produces a benefit that the other shareholders don't generally share, then the directors or those in control will be required to prove both fair dealing and fair price, a demanding standard. The entire fairness analysis essentially mandates judicial scrutiny of a transaction or action.<br /> <br /> Delaware recognizes that controlling shareholders have fiduciary duties to their fellow shareholders. "[W]hen a shareholder presumes to exercise control over a corporation, to direct its actions, that shareholder assumes a fiduciary duty of the same kind as that owed by a director." Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 109-10 (Del. 1952). Thus, many types of conduct that would give rise to oppression claims in other jurisdictions would also support breach of fiduciary duty claims in Delaware.<br /> <br /> Controlling shareholders can be held liable in Delaware, when they:<br /> <br /> * cause the corporation to issue additional shares to the controlling shareholder at an inadequate price;<br /> * reduce the economic value of the minority's shares disproportionately or impinge on their voting rights;<br /> * engage in a course of dealing designed to force the minority out at below fair market value for their shares; or<br /> * sell their controlling interest to a buyer without adequate due diligence to assure that he was not a corporate looter or fraudster.<br /> <br /> In Delaware, it is very important to determine whether the claims being brought against those in control are direct claims - in which the minority shareholders were directly injured by the breach of fiduciary duties; or derivative claims - in which the corporation is injured. The distinction between direct and derivative claims in Delaware can often determine whether a claim can proceed, and what steps must be taken before it can be brought. The rules for distinguishing direct from derivative claims can often be complex and appear to be constantly evolving under Delaware law, which we will address in a subsequent post.</div> <div class="source">Article Source: <a href="http://www.goinglegal.com/shareholder-oppression-in-delware-1527013.html">http://www.goinglegal.com/shareholder-oppression-in-delware-1527013.html</a></div> <div class="author"> <div class="authorOccupation"><strong>Occupation:</strong> Attorney</div> <div class="authorBio"></div> <div class="authorUrl"><a href="http://www.sgalaw.com" target="_blank">http://www.sgalaw.com</a></div></author> </body> </html>

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Shareholder Oppression in Delware Author: Samuel Goldman & Associates Delaware does not have a cause of action for oppression per se, but it does offer relief for minority shareholder oppression-like claims applying other legal principles. Thus, oppression-like claims must be carefully pleaded in Delaware. Since court's in other states are likely to apply Delaware law to oppression-like claims to companies organized in Delaware, vigilance must also be exercised in pleading claims relating to Delaware corporations in non-Delaware courts. Some courts outside of Delaware, such as the Southern District of New York and the Northern District of Illinois, have upheld causes of action for shareholder oppression under Delaware law, while others, such as the District of New Jersey, have dismissed oppression claims for failure to state a claim under Delaware law. Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993), is a Delaware case that often cited for the proposition that Delaware does have a shareholder oppression remedy, and also for the proposition that it does not. The case states that "[t]he entire fairness test, correctly applied and articulated, is the proper judicial approach" to deciding claims brought by minority shareholders against those in control of the corporation. Thus, some conclude that oppression claims may be pursued under the entire fairness doctrine. However, Nixon v. Blackwell also, contains language that seems to indicate otherwise: A stockholder who bargains for stock in a closely-held corporation and who pays for those shares ... can make a business judgment whether to buy into such a minority position, and if so on what terms. One could bargain for definitive provisions of self-ordering permitted to a Delaware corporation through the certificate of incorporation or by-laws by reason of the provisions in [Delaware law, and] in addition to such mechanisms ... [such as] elaborate earnings tests, buy-out provisions, voting trusts, or other voting agreements. The tools of good corporate practice are designed to give a purchasing minority stockholder the opportunity to bargain for protection before parting with consideration. This lack of sympathy for minority shareholders who have not bargained for written protections of their rights fails to recognize that minority shareholders often find themselves in the minority due to factors they could not anticipate at the outset of the venture, and that even the best and most extensive shareholders' agreements cannot address all of the many varied and creative ways that the majority can use its power to unfairly harm the minority. Nevertheless, many of the claims falling under the general category of shareholders' oppression can be brought under Delaware law using other legal principles accepted in that State. The entire fairness doctrine, mentioned above, is one of these. It is an exception to the business judgment rule, which would ordinarily protect directors' actions from judicial scrutiny, and creates a framework for granting minority shareholders relief when directors act in their own self-interest. Thus, when a minority shareholder shows that directors stand on both sides of a transaction or will derive a special benefit from the transaction, i.e. there is a conflict of interest that produces a benefit that the other shareholders don't generally share, then the directors or those in control will be required to prove both fair dealing and fair price, a demanding standard. The entire fairness analysis essentially mandates judicial scrutiny of a transaction or action. Delaware recognizes that controlling shareholders have fiduciary duties to their fellow shareholders. "[W]hen a shareholder presumes to exercise control over a corporation, to direct its actions, that shareholder assumes a fiduciary duty of the same kind as that owed by a director." Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 109-10 (Del. 1952). Thus, many types of conduct that would give rise to oppression claims in other jurisdictions would also support breach of fiduciary duty claims in Delaware. Controlling shareholders can be held liable in Delaware, when they: * cause the corporation to issue additional shares to the controlling shareholder at an inadequate price; * reduce the economic value of the minority's shares disproportionately or impinge on their voting rights; * engage in a course of dealing designed to force the minority out at below fair market value for their shares; or * sell their controlling interest to a buyer without adequate due diligence to assure that he was not a corporate looter or fraudster. In Delaware, it is very important to determine whether the claims being brought against those in control are direct claims - in which the minority shareholders were directly injured by the breach of fiduciary duties; or derivative claims - in which the corporation is injured. The distinction between direct and derivative claims in Delaware can often determine whether a claim can proceed, and what steps must be taken before it can be brought. The rules for distinguishing direct from derivative claims can often be complex and appear to be constantly evolving under Delaware law, which we will address in a subsequent post. Article Source: http://www.goinglegal.com/shareholder-oppression-in-delware-1527013.html About the Author: http://www.sgalaw.com

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Shareholder Oppression in Delware

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