Minority Shareholder’s Lawsuit for Bad Faith May Proceed, Says N.C. Business Court
Corporations -- and especially closely held and family corporations -- must be careful to observe the rights of minority shareholders. At least, that’s the lesson from a recent North Carolina Business Court decision that permitted a minority shareholder’s lawsuit for, among other things, bad faith and breach of fiduciary duty.
The plaintiff was the minority shareholder of a commercial real estate company. He filed a lawsuit against the corporation when he was not paid a dividend. The corporation was allegedly flush with cash, and had paid a divided in recent years when it had less cash on hand, but refused to pay a dividend for the current year.
Under North Carolina law, a shareholder has a right to make a demand for a dividend. The corporation then may either pay, or buy the shareholder’s shares. That is what happened here. Instead of being paid the dividend he request, the shareholder was allegedly paid less than the shares were worth, depriving him of any interest in the company. Because of this, he alleged that he was being frozen out of the company for less than the value of his shares.
The case is here: Johnston v. Johnston Properties, Inc.
The applicable statute is N.C.G.S. § 55-6-40, which lays out the procedure for requesting and providing dividends.
The court, in denying the corporation’s motion to dismiss the case, stated that even though it may have complied with the letter of the law, the corporation did not comply with the spirit, explaining that “oppressed minority shareholders have the aid of equity for adequate protection of their shareholder interests.” The court went on to quote the controlling North Carolina Supreme Court case on this issue, Gaines v. Long Mfg. Co., which states as follows:
[t]he controlling corporate authorities will not be permitted to use their powers arbitrarily or oppressively by refusing to declare a dividend where net profits and the character of the business clearly warrant it. Accordingly, if it be made to appear that the controlling management is acting in bad faith, for their own gain and advantage, in oppressive disregard for the rights of minority stockholders ... a court of equity may be invoked to break the shackles of any such oppressive control.
The quoted case, along with the North Carolina Business Court case at issue, make clear that majority shareholders may not use oppression or bad faith to refuse to issue a dividend, or to freeze out a minority shareholder, even if they technically comply with the law.
DYE CULIK PC is a Charlotte, North Carolina law firm that represents corporations and entrepreneurs in business matters from starting a corporation to litigating shareholders’ rights under state law. If you have a business law matter in need of attention, contact us at 980-999-3557 to see how we can help your business succeed.