South Carolina Lawyer
SC Lawyer, November 2010, #2.
Oppression of Minority Shareholders and Court Ordered Fair Value
South Carolina LawyerNovember 2010Oppression of Minority Shareholders and Court Ordered Fair ValueBy Thornwell F. Sowell and George W. DuRantThe leading treatise on shareholder disputes for years hasbeen O'Neal and Thompson's Oppression of Minority Shareholders and LLC Members. In the preface to the 2007 Revised Second Edition of that work, the authors note that "[m]ost American lawyers do not realize the tremendous amount of litigation in this country arising out of shareholder disputes." 1 F. Hodge O'Neal and Robert B. Thompson, Oppression of Minority Shareholders and LLC Members iii (Rev. 2d ed. 2007). The authors go on to note that since the publication of the first edition of their treatise, "the volume of litigation grounded on minority shareholder oppression-actual, fancied or fabricated-has grown enormously, and the flood of litigation has been pronounced in both federal and state courts, with an especially large number of suits challenging the validity of 'cash-out' mergers." Id. They note, however, that "[t]he reports of judicial decisions involving shareholder disputes are poorly digested and are not satisfactorily or uniformly 'keyed' or classified in the research aids. Although a considerable amount of literature on oppression of minority shareholders exists in Britain and the Commonwealth countries, in this country legal writing on shareholder oppression and on 'corporate dirty tricks,' such as 'squeeze-outs' of minority shareholders, is fragmentary and scattered." Id.
Much of corporate practice is not reflected in case decisions or statutes. When lawyers advise business clients on how to squeeze out business associates, the "squeezees" (persons whose elimination from an enterprise is being sought or who otherwise are being oppressed by controlling shareholders) often do not have the will or the money to resist. These cases of course are never reported anywhere, except an occasional one in a newspaper article. In many other instances, an oppressed minority shareholder does go to a lawyer, but the dispute is compromised and settled.Id.
In South Carolina, we are fortunate that the concept of squeeze-out or oppression of minority shareholders has been definitively discussed by Chief Justice Toal in Kiriakides v. Atlas Foods Systems and Services, Inc.,343 S.C. 587, 541 S.E.2d 257 (2001). Although a recent Business Court Order, Covan v. Blue Cross and Blue Shield of South Carolina, 2010-01-08-02, No. 2008-CP-40-5294 (S.C. Common Pleas Jan. 8, 2010), comments on Kiriakides and restricts its application to the closely-held corporation, Kiriakides has not been commented upon in subsequent appellate cases, possibly because it is such a definitive explanation of Section 33-14-300 of the S.C. Code (Rev. 2006) and the concept of oppression of a minority shareholder in a closely-held corporation.
Kiriakides is a small treatise on what is required to plead and prove the oppression of a minority shareholder in South Carolina. We know, for instance, that "South Carolina's judicial dissolution statute was amended in 1963 in recognition of the growing trend toward protecting minority shareholders from abuses by those in the majority." 343 S.C. at 597, 541 S.E.2d at 263. Section 33-14-300 sets out the grounds for a judicial dissolution, including when the directors or those in control of the corporation have acted in a manner that is illegal, fraudulent, oppressive or unfairly prejudicial either to the corporation or to any shareholder. "The statute, as amended, 'broadens the scope of actionable conduct by providing the frozen-out minority shareholder a right of action based on conduct by the majority shareholders which might not rise to the level of fraud.'" Kiriakides, 343 S.C. at 597,541 S.E.2d at 263, n.17. Furthermore, Section 33-14-310 expressly allows the court the discretion to enter an order "providing for the purchase at their fair value of shares of any shareholder, either by the corporation or by other shareholders," and this relief specifically "may be granted as an alternative to a decree of dissolution or may be granted whenever the circumstances of the case are such that the relief, but not...