A common theme among minority shareholders seeking legal representation is termination of employment. Readers of this blog may be aware that termination can often constitute minority shareholder oppression, warranting a remedy such as a court-ordered buyout. But, unfortunately, not all terminations are equal, as not all terminations constitute oppression.
The key to whether termination of employment amounts to minority shareholder oppression is what the court calls the “reasonable expectations” of the employee/shareholder. While I have explained this in a prior article, questions raised in recent cases make me believe that this issue should be addressed one more time.
In one case, a man married into a business when he wed the daughter of the majority shareholder. Not only did he gain a wife, but he received a job and a 20% ownership in the company. When he and the majority owner’s daughter got divorced, though, he was unceremoniously (but not really unexpectedly) fired. An argument could be made that he had a reasonable expectation of having a job as long as he was a shareholder, since he was clearly a valuable member of the company. However, there is also a strong argument that he could not reasonably expect to continue working at the company if he divorced the child of his new business partner. And when a court delves into not merely what the shareholder actually believed, but what he should have believed (the “reasonableness” of that belief), it is easy to see that we have left the realm of the law, and are now into psychology and human emotions.
Not wanting to leave his fate up to a judge who intended to tell him whether his life plan upon marrying his wife was “reasonable,” this case settled. But the buyout was probably not as large as it would have been had he, the minority shareholder, been one of the founders. In such a case, he would have owned the same twenty percent stake. In both cases, the 20% interest would have had the same value. However, it would have been easier to argue that a co-founding shareholder had a reasonable expectation of continued employment than one who married into ownership. And, of course, a stronger liability argument usually results in a better settlement, since you are negotiating from a position of strength.
In my next article, I will address some measures that may be taken to avoid having a court determine whether your expectations of continued employment were “reasonable.”