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Example of the Minority Squeeze Out in Action

The following is a ruling I received from the Georgia Court of Appeals regarding a classic minority squeeze out scenario. I have included this Order because it provides a very useful summary of all the typical claims and defenses which are raised in a case of minority oppression. The underlying facts of the case are useful as they involved all of the steps routinely taken by a majority shareholder to destroy the value of a minority shareholder's interest in a small, privately held company.

In this case, the Plaintiff began a company to perform adjusting services for insurance companies and other groups. The Plaintiff was an experienced professional in the field of adjusting property claims, and shortly thereafter two of his professional colleagues and friends joined him to form a full-service independent adjusting company with each principal owning one-third of the stock. After several successful years, a personality dispute arose between the Plaintiff and his two colleagues. An argument ensued one afternoon, after which Plaintiff took time off for a medical condition. When he returned to the office, he discovered that the locks had been changed. The majority shareholders then cancelled all of the Plaintiff's salary and benefits and refused to declare a profit dividend at the end of the year. Plaintiff filed suit.

As the attached Order states, the Court ruled that the Defendants, including the corporation itself, were liable to the Plaintiff for damages constituting the tort of 'minority oppression,' specifically breach of fiduciary duties and fraud. Interestingly, the Court went further than most courts dealing with these types of torts and held that the Defendants had also interfered with the Plaintiff's employment opportunities.

Because the Plaintiff had been an officer and director of the small corporation, the company was required to follow the procedures set forth in the Bylaws for holding meetings of the Board of Directors to vote to terminate an officer. The Court ruled that by failing to follow this procedure in the Bylaws when it terminated the Plaintiff, an officer of the company, the corporation was liable for damages for the tort of wrongful discharge, even though Georgia is an employment at will state and companies are generally free to terminate an employee without liability. Further, the Court ruled that by failing to follow the Bylaws and wrongfully terminating the Plaintiff, the corporation and the Defendants were also subject to damages for tortuously interfering with the Plaintiff's employment with the corporation. This cause of action is extremely rare in employment settings and is generally available only where the employee/officer has a contract of employment.

Finally, the Court ruled against the Defendants in their claim of tortious interference with business relationships and corporate opportunities. The Defendants had tried to allege that the Plaintiff had wrongfully competed with them after being termnated. The Court of Appeals followed a long line of caselaw holding that upon being terminated from the company, the Plaintiff was free to compete, absent a covenant not to compete.

If you or your company is involved in the termination of an officer/shareholder, I suggest taking a look at the enclosed Order as it provides a very useful overview of most of the torts and claims that can be raised in such a situation and provides a good summary of the law in this area.

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