In Virginia, a court may order that a corporation be dissolved by its shareholders if the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent. While Virginia law does not specify what conduct by majority shareholders constitutes oppression, courts have begun taking a much more expansive view as to what such conduct entails and are showing increasing support for minority shareholders.
Generally speaking, Virginia courts have defined oppression as “conduct that departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.” Many recent court opinions have highlighted that a finding of oppression does not require “imminent” disaster or a finding of fraudulent conduct; however, it does “contemplate a continuous course of conduct and includes a lack of probity in corporate affairs to the prejudice of some of its shareholders.” In the past, courts have been hesitant to find in favor of the minority shareholder by ordering a drastic measure like dissolution of the corporate entity. Now, minority shareholders are increasingly advocating for their rights by bringing suit against majority shareholders in closely held corporations.
In a recent landmark opinion, Colgate et al v. The Disthene Group, Inc., an action was brought by minority shareholders (owning 42 percent of a closely held corporation), alleging that the majority shareholders engaged in a pattern of oppressive and fraudulent conduct that was designed to disadvantage them and waste corporate assets. In their request for relief they demanded that the corporation be dissolved. The majority shareholders relied on the “business judgment rule” to justify their actions. The business judgment rule essentially shields directors from actions taken or not taken, by protecting good-faith business judgments from being second-guessed in court. However, this rule doesn’t apply when the director fails to engage in informed decision-making or makes a decision in the best interests of the director, as an individual, rather than of the corporation.
Not only did the judge in Colgate rule in favor of the minority shareholders, but the judge also specifically noted that non-voting shareholders have the right to be treated fairly by the corporate officers and directors. The judge explained that courts are becoming increasingly intolerant of shareholder oppression and discussed facts indicating that the officers and directors had breached their duties. The judge found that officers and directors breached their duties by: reducing dividends in retaliation for minority shareholders filing a lawsuit; misrepresenting the value of stock when negotiating with minority shareholders who were selling shares back to the company; increasing compensation for majority shareholders; misusing and wasting corporate assets; favoring interests of family members at the expense of minority shareholders; and refusing to allow inspection of corporate books and records. The judge ultimately ordered the dissolution of the closely held corporation because of this oppression of minority shareholders and waste of corporate assets.
As evidenced by Colgate, the consequences of oppressing minority shareholders can be disastrous (and in the aforementioned case, 77 million dollars disastrous!). The type of conduct discussed above can support claims of breach of fiduciary duty, conversion, conspiracy to breach fiduciary duties, and conspiracy to convert – which, if ruled against the majority, can be fatal (literally) for the corporation. While dissolution is generally considered an extreme result, the risk is now even more real for business owners. This case sheds light on the duties of controlling shareholders and the fact that minority shareholders’ rights are being recognized (and protected). Before Colgate, majority shareholders at many companies in Virginia got away with putting their interests ahead of minority shareholders. This case is a critical turning point for business litigation by making the bold statement that controlling shareholders cannot disguise their actions under the business judgment rule and that they can, and will, be held accountable for their actions.
The facts of every case are unique and the oppressive practices cited here are not the only ways majority shareholders may oppress minority shareholders. Additionally, dissolution is not the only remedy available to oppressed shareholders. Attorneys at General Counsel PC have represented businesses of all sizes for over 10 years. Our attorneys have years of experience providing legal counsel and education to business owners across Virginia to help ensure that business owners are aware of the possible risks and can implement practices to mitigate their exposure to liability. For more information about how you can ensure your business is protected, call General Counsel PC at 703-556-0411 today.
 Giannotti v. Hamway, 387 S.E.2d 725, 730 (Va. 1990)
 Colgate et al v. The Disthene Group, Inc., 85 Va. Cir. 286 (2012)