A recent court decision regarding a local business could have broad implications for Michigan’s small and family-owned businesses.
In Young v. VanderMeer (“Young”), Plaintiff Amy Young and Defendant Teresa VanderMeer each owned a 50% interest in Grand Connection, Inc. (“GCI”). Young alleged, among other things, that VanderMeer engaged in oppressive conduct that violated her rights as a shareholder.
Michigan law has long allowed shareholders to bring these shareholder oppression suits. Section 489 of the Business Corporation Act allows a shareholder to bring an action against directors and those in control of the corporation for illegal, fraudulent or willfully unfair and oppressive conduct. Willfully unfair and oppressive conduct may include, but is not limited to, such things as:
- Terminating the shareholder’s employment with the company;
- Refusing to pay dividends;
- Preventing a shareholder from exercising their rights as a shareholder;
- Reducing a shareholder’s interest in the company; and
- Engaging in self-dealing that harms the company.
What provides the twist in this case is that Section 489 is often referred to as the “minority shareholder oppression” statute as it is generally the majority shareholder who has the power to take actions regardless of the wish of any minority shareholders. In Young, VanderMeer responded that since Young is not a minority shareholder, she cannot bring an action under Section 489. The trial court agreed with VanderMeer and dismissed the claim.
On appeal, however, the Michigan Court of Appeals disagreed stating that “we are not aware of any case holding that the statute is only available to minority shareholders” and overturned the trial court’s decision, reinstating Young’s shareholder oppression claim. The Court of Appeals further held that “control” was the key for these claims. They noted that Young had sufficiently alleged that VanderMeer was in control of GCI and had presented evidence to support this position including that VanderMeer had taken over GCI’s financial affairs, had excluded her from GCI’s website and email server, and was exercising authority that was vested in Young as the president of GCI.
This decision could have broad implications for small and family-owned businesses, which are often owned equally amongst different family members. Previously, an argument could have been available that none of these “co-equal” owners could bring a shareholder oppression claim against the other. But based on Young, if any one owner begins taking actions that control the direction of the company and that shut out the other owners, a shareholder oppression claim may be available.
Young also brings about some questions that concern family businesses. Particularly relevant here is the question of whether a minority shareholder, rather than a co-equal owner, could be considered in “control” for the purposes of Section 489. The Court of Appeals’ decision suggests that such a shareholder could be considered in control, since it is about the actions taken by the shareholder rather than about ownership interest. This could be especially relevant, for example, in family owned businesses where aging parents hold a majority interest in the company but minority-owning children or other relatives run the day-to-day operations.
Young has reinforced the notion that shareholders should:
- Have regular dialogue with one another;
- Vote and take action in accordance with their interest, the company bylaws and any applicable voting agreements; and
- Record those decisions with the company.
These actions will not only help to prevent animosity and surprise amongst the shareholders, which are often the major roots behind a shareholder oppression claim, but these can be used as evidence later on should a shareholder oppression claim arise.
As a closing note, though Young was decided in the context of a corporation and under Section 489, the Michigan Limited Liability Company Act has a similar oppression statute for members. Therefore, Young is equally applicable in the context of limited liability companies.
Please contact Jarrod Trombley if you have any questions about shareholder oppression claims.