It’s Getting Cold Out Here! Shareholder oppression and member freezeouts.
Shareholder oppression is an important concept for both minority and majority shareholders to understand. Simply put, shareholders in corporations owe each other fiduciary duties to treat each other fairly. Majority shareholders cannot abuse their majority position to the detriment of the minority. Minority shareholders have substantial rights even if they can get outvoted. South Carolina has developed substantial case law regarding majority shareholder oppression in corporations. However, the Supreme Court only recently formally extended the concept of oppression and freeze-outs to limited liability companies.
The seminal case for corporate shareholder oppression in South Carolina is Kiriakides v. Atlas Food Systems & Services, Inc., 343 S.C. 587, 541 S.E.2d 257 (2001). The Supreme Court found that minority shareholders of a corporation were constructively “frozen out” of daily business through oppressive conduct by majority shareholders and, thus, were entitled to a fair buyout of their ownership interest. The court reviewed that majority shareholders acting in a manner that is unlawful, oppressive, fraudulent, or unfairly prejudicial can place minority shareholders in a trapped investment with no expectations of deriving future benefits. Therefore, the court reserved the power to dissolve the corporation or order relief as it deems just.
The Supreme Court of South Carolina recently extended these concepts to limited liability companies in Wilson v. Gandis, 430 S.C. 282, 844 S.E.2d 631 (2020). The Supreme Court recognized members or managers in a limited liability company can also be constructively “frozen out” by their business partners through oppressive conduct and can be entitled to the same legal and equitable relief as received by minority shareholders in corporations.
Examples of oppressive conduct by a majority member include:
- Disregarding a minority member’s financial rights by withholding distributions, removing a minority member from payroll, or terminating a minority member’s insurance benefits and other privileges
- Ignoring a minority member’s voting rights by excluding them from decisions and operations
- Leveraging voting power to force a minority member to succumb to unfavorable buyout terms
- Secretly monitoring a minority member’s communications
- Conspiring with others to freeze out a minority member
- Diluting ownership interest through a large equity issuance
- Manipulating financial records to make the business appear less profitable
Belser Law Firm has the tools and experience to help identify shareholder/member oppression cases and assist in gaining relief from oppressive conduct. If you are looking for help in a shareholder/member oppression suit, contact us at 803-929-0096.