Did you know that, under the right circumstances, a trial court may well shut down an ongoing, multi-faceted and profitable business whose management has engaged in “oppressive” behavior toward minority shareholders?

While such a result is generally considered extreme in most minority shareholder oppression cases, the risk is real, as demonstrated in the recent case of Colgate, et al. v. The Disthene Group, Inc. in the Circuit Court of Buckingham County. A lengthy opinion was issued by Judge Jane Marum Roush, a preeminent and highly regarded Fairfax County Circuit Court Judge who was sitting by designation in the Buckingham County Court. The Virginia Supreme Court recently declined to hear the company’s appeal of the trial court’s Order of Dissolution, leaving Judge Roush’s opinion in place, and making it perhaps the most important minority shareholder oppression case in Virginia.

In a lengthy opinion, Judge Roush concluded that non-voting shareholders in a closely-held corporation are inherently disadvantaged by virtue of their non-voting status and the lack of a market to sell their shares. However, they have a corresponding “right to be treated fairly by the corporate officers and directors in accordance with the officers’ and directors’ fiduciary duties.” In this case, Judge Roush found the facts to have been that the officers and directors of The Disthene Group, Inc. had breached their duties by engaging in the following practices:

  1. The controlling shareholders used their power to control dividends in order to retaliate against the non-voting shareholders whom they wished to freeze out of the company.
  2. The controlling shareholders deliberately withheld material information about the value of the company’s stock when dealing with shareholders who were selling shares of stock back to the company.
  3. At the same time that dividends were significantly reduced, compensation for certain executives (who were also among the group of controlling shareholders) was sharply increased.
  4. The controlling shareholders favored the interests of their own family members at the expense of the non-voting shareholders.
  5. Misuse and/or waste of corporate assets without fair compensation to the company and for non-business purposes.
  6. Refusing to allow inspection of corporate books and records. By statute (Va. Code § 13.1-771), shareholders of a Virginia corporation are entitled to inspect a company’s books and records.

As a result, the Court ordered the dissolution of the corporation pursuant to Va. Code § 13.1-747 which allows a Circuit Court to dissolve a corporation when, among other things, “the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.”

The facts of every situation are unique. These oppressive practices cited in Disthene are not the only ways that controlling shareholders can oppress minority and non-voting shareholders, and dissolution may not be the only remedy available to oppressed shareholders. The attorneys at McCandlish & Lillard advise corporations on the impact of business decisions on their fiduciary duties to shareholders, and provide counsel both to shareholders who believe they have been the victim of oppression at the hands of corporate directors, officers, and controlling shareholders, and to business owners who seek appropriately to maintain, or achieve increased, control of their companies. For more information or to request a consultation, please contact Peyton Mahaffey at (703) 934-1168 or Derek Karchner at (703) 934-1120.

Disclaimer: This firm only offers legal advice to clients, and the facts of a particular situation usually drive the legal advice we give to clients. This message is not intended to be legal advice appropriate for all situations.