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Michigan Court of Appeals Decision Franks V. Franks

Levin Law | 11.30.2020

How a Recent Court Decision Affects Minority Shareholder Oppression Claims

In September 2019, the Michigan Court of Appeals reversed and remanded a case involving minority shareholder oppression claims. At issue in Franks v. Franks was whether the trial court erred when granting summary disposition to the plaintiffs, a group of minority shareholders in a closely held corporation. The shareholders’ dispute involved several members of the same family who had an interest in Burr Oak Tool, Inc. (“Burr Oak”).

The court established two important rules in remanding the case:

  1. Where a plaintiff alleges that a defendant’s acts were willfully unfair and oppressive to the corporation or them as shareholders, they must show that the defendant acted with intent to interfere with their interests as shareholders.
  2. The business judgment rule does not prohibit a court from evaluating a defendant’s business decisions to determine whether they acted in bad faith or in an attempt to oppress the rights of minority shareholders.

As noted in the decision,  plaintiffs who owned Class B and Class C shares were suing majority shareholders who owned Class A shares or had an active role in the management of the corporation for violating MCL 450.1489, also referred to as the shareholder-oppression statute.

Specifically, at the trial court, plaintiffs argued that the defendants used their controlling interest “to benefit themselves and their families” at the expense of minority shareholders by implementing an unfair stock redemption plan and wrongfully withholding payment of dividends to “squeeze-out” non-voting stockholders.

What Is Willfully Unfair and Oppressive Conduct?

Despite receiving a valuation at approximately $598 per share, defendants offered a purchase price of just $62 per share. The defendants conceded that there was no valuation for the low offer, and emails presented during the hearing show that they believed minority shareholders would agree to the price since there was no market value in the absence of dividend payouts.

The defendants eventually offered to buy shares at $248 per share. Still, the plaintiffs refused to accept, stating that those with a controlling interest had engaged in willfully unfair and oppressive conductaffecting their rights as shareholders.

What Are the Protections Under the Business Judgment Rule?

On the other hand, the defendants argued that they had a legitimate business purpose for not issuing dividends after the death of Burr Oak founder (and their grandfather), Newell A. Franks. Defendants claimed that, despite the company’s valuation at over $46 million in 2012, significant amounts of money had to be used to “cover obligations under Newell A. Franks’ estate plan” after his death and that the company needed to focus on expansion to remain competitive.

Arguing protection under the business judgment rule, defendants believed that the court was prohibited from interfering in “matters of business judgment and discretion unless directors or officers are guilty of willful abuse of their discretionary powers or act in bad faith.” 

At the trial court, they stated that not paying dividends affected all shareholders equally and could not be oppressive against minority shareholders. Furthermore, they stated that their offer to purchase stock at a particular price was not in itself oppressive.

The trial court found evidence to support infringement of shareholders’ rights and, at an evidentiary hearing, ruled that the corporation must buy non-voting members shares at a rate of $712 per share based on expert testimony. Defendants appealed the summary disposition and remedy granted at the lower court.

The Michigan Appellate Court Decision on Minority Shareholder Claims

On appeal, the court found that the trial court had erred in issuing a summary disposition for the plaintiffs and remanded the case for proceedings consistent with their opinion. At issue was whether enough evidence was presented to conclude that the defendants acted with intent.

The Michigan appellate court found for a shareholder to be successful in a case claiming shareholder oppression, the plaintiff must show that the defendant acted with intent to substantially interfere with the interests of the shareholder as a shareholder.

The decision stated that MCL 450.1489 allows for a shareholder to bring an equitable claim “where acts of directors or those in control of the corporation are illegal, fraudulent, or willfully unfair and oppressive to the corporation or shareholder.” The court found that a plaintiff must show that the defendant acted with intent in their willfully unfair and oppressive conduct; otherwise, it would impose strict liability.

The court put forward a 4 prong test:

  • The plaintiffs must show that they were shareholders, 
  • That the defendants were directors or in control of the corporation, 
  • That the defendants engaged in acts, and
  • That those acts were illegal, fraudulent, or willfully unfair and oppressive to the corporation or to them as shareholders.

Willfully unfair and oppressive conduct is defined as “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder.” In remanding to the lower court, the justices found that the plaintiff must show that the defendant’s conduct was done with the intent to substantially interfere with the interests of the shareholder as a shareholder.

Additionally, the court found that the business judgment rule only applies where there is “no fraud, misconduct, or abuse of discretion.” There can be no legitimate business purpose if the conduct is done to defraud or oppress a shareholder’s interests. Therefore, a court may evaluate a defendant’s business decisions, including their dividend policy, to determine whether it was done in bad faith or amounted to shareholder oppression.

Finally, the appellate court determined that the trial court has broad authority to order a remedy that includes requiring the corporation to purchase the shares of a shareholder at fair value without discounting based on marketability. The remedy, however, must be equitable and cannot threaten the viability of the business or implicate innocent third parties’ interests.

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