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A Better Partnership
July 17, 2014

MSC holds that there is no right to a jury trial in shareholder oppression cases

In Madugula v Taub, No 146298, the Michigan Supreme Court addressed the issue of whether there is a right to a jury trial for shareholder oppression claims brought under MCL 450.1489 (“§ 489”) of the Business Corporation Act. Ultimately, the court held that because a shareholder oppression claim is equitable in nature, there is no statutory or constitutional right to a jury trial.  Instead, it must be heard by a court of equity. Accordingly, the Michigan Supreme Court reversed the Court of Appeals’ decision and the trial court’s judgment in favor of Madugula and remanded the case for further proceedings.
 
Rama Madugula was hired as a vice president for Dataspace, Inc., which was founded by Benjamin A. Taub.  Taub was the sole shareholder of Dataspace until Madugula and Andrew Flower became part owners of the company in 2004.  The three shareholders entered into a stockholders’ agreement that required supermajority approval for material changes to the business, among other things.  Subsequently, Taub unilaterally changed the company’s focus to a new product, which Madugula claimed was a material change that required approval pursuant to the stockholders’ agreement.  In response, Taub terminated Madugula’s employment with Dataspace, and Madugula filed a complaint for shareholder oppression.  Taub filed a motion in limine, arguing that Madugula did not have the right to a jury trial for this claim.  The Michigan Supreme Court granted Taub’s application for leave to appeal the lower courts’ decisions granting a jury trial.
 
The court first addressed the question of whether the statutory language in § 489 afforded a claimant the right to a jury trial.  Although § 489 contains no explicit references to “jury trial,” the statute as a whole must be examined to determine whether the Legislature intended to grant a claimant the right to a jury trial.  In § 489, the Legislature included the phrase “an award of damages,” which typically establishes a legal claim that affords a claimant the right to a jury trial.  However, the statute also states that the “circuit court may make an order or grant relief as it considers appropriate,” recognizing a court’s fact-finding authority but referencing no other method of fact-finding.  MCL 450.1489(1).  Thus, when examined in light of the rest of the statute, the phrase “award of damages” does not suggest that the Legislature intended to grant a claimant the right to a jury trial. Moreover, the legislative history of § 489 also suggests that shareholder oppression claims were intended to be tried before a court of equity. Accordingly, the court concluded that the statutory language of § 489 does not provide the right to a jury trial.
 
The court also addressed whether a constitutional right to a jury trial existed for claims brought under § 489. A constitutional right to a jury trial exists in all cases where the right existed prior to the adoption of the Constitution as well as “to cases arising under statutes enacted subsequent to adoption of the Constitution which are similar in character to cases in which the right to jury trial existed before the Constitution was adopted.” Conservation Dep’t v Brown, 335 Mich 343, 346; 55 NW2d 859 (1952). Because § 489 was enacted after the 1963 Constitution, the court examined whether a claim pursuant to § 489 is similar in character to a claim that provided the right to a jury trial when the Constitution was adopted. The court noted that a shareholder oppression claim resembles two claims that existed prior to the adoption of the 1963 Constitution: a shareholder derivative claim and a claim for corporate dissolution. The court ultimately concluded that both of these claims were equitable in nature, and accordingly, a § 489 claim would have also been considered equitable in nature at the time the Constitution was adopted. Moreover, the remedies sought by Madugula would have also fallen within the jurisdiction of a court of equity at the time the 1963 Constitution was adopted. Thus, no constitutional right to a jury trial exists for claims brought under § 489.
 
Finally, the court held that breaches of the stockholders’ agreement may be used as evidence of shareholder oppression for purposes of § 489. Because the shareholders voluntarily entered into the stockholders’ agreement, which modified their statutory voting and shareholder rights, these modified rights can be used as evidence of a breach of those rights, and ultimately, as evidence of shareholder oppression.

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