Shareholders controlling a corporation have an obligation not to abuse their control to the detriment of minority shareholders. In Michigan, these minority shareholders are protected by the Shareholder Oppression Statute (MCL 450.1489), which makes it a violation for majority shareholders to engage in behavior that is “illegal, fraudulent, or willfully unfair and oppressive.”
The Michigan Supreme Court recently clarified the enforcement of Michigan’s Shareholder Oppression in Madugula v. Taub. The Court in Madugula ruled that shareholder’s bringing oppression claims had no right to a jury trial and these claims should be presented to a court of equity. Furthermore, the Court found a breach of the shareholder’s agreement could be used as evidence of shareholder oppression.
No Right to Jury Trial for Shareholders Bringing Oppression Claims
The Court in Madugula found that there was no right to a jury trial for shareholder’s bringing oppression claims. In making its decision, the Court noted that a right to a jury trial may exist either statutorily or constitutionally.
The Court conducted a lengthy analysis of the shareholder oppression statute to determine whether it provided a right to a jury trial. After looking at the express language of the statute, the history of the statute and the relief granted by the statute, the Court concluded that a jury trial was not intended for shareholders bringing oppression claims under the statute.
The Court then determined that these shareholders also did not have a constitutional right to a jury trial. Importantly, the Court noted that a claimant’s right to have an equitable controversy decided by equitable methods was just “as sacred as the right of trial by jury.” Deciding that shareholder oppression claims are equitable claims, the Court concluded that the majority shareholders contesting the claim had a right to have the case resolved by a court of equity.
Since the right to a jury trial was neither afforded by the statute or the constitution, the Supreme Court held that the trial court erred in granting the shareholder a jury trial and the Court of Appeals erred in affirming the trial court’s grant of a jury trial. The Supreme Court then reversed the decisions of these two courts and remanded the case to the trial court.
Breach of Shareholder Agreement May be Used as Evidence of Shareholder Oppression
The Supreme Court also found that a minority shareholder may use a breach of the shareholder’s agreement as evidence of shareholder oppression.
The majority shareholder in Madugula argued that allowing a breach of the shareholder agreement to be submitted as evidence of shareholder oppression would necessarily equate a simple breach of contract to shareholder oppression. However, the Court disagreed and found that because shareholder agreements are often used to modify the statutory rights of shareholders, the breach of these agreements should be allowed as evidence of shareholder oppression. Furthermore, the Court noted that it is up to the trial court to determine to what extent any breach of the shareholders’ agreement evidences such oppression in a particular case.
The Court’s full opinion can be accessed at the link below:
Click to access 146289-Opinion.pdf
If you have concerns about your rights as a shareholder, or you have a business that has questions about claims that have been asserted by a shareholder, please contact the attorneys at Demorest Law Firm.
