Balvik v. Sylvester
411 N.W.2d 383 (1987)
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Rule of Law:
In a close corporation, oppressive conduct by a majority shareholder justifying judicial relief occurs when their actions, viewed as a whole, defeat the reasonable expectations of a minority shareholder, particularly expectations of continued employment, management participation, and a return on investment.
Facts:
- In 1979, Elmer Balvik and Thomas Sylvester formed a partnership, Weldon Electric, with Balvik contributing 30% and Sylvester contributing 70% of the capital, but both retained equal management rights.
- In 1984, at Sylvester's urging, they incorporated the business. Sylvester received 70% of the stock and Balvik received 30%, giving Sylvester majority voting control.
- Sylvester was elected president and Balvik was elected vice-president, and both served on the board of directors with their wives.
- In 1985, disputes arose over corporate management, with Sylvester wanting to reinvest profits and Balvik wanting them paid out as bonuses.
- In August 1985, following these disputes, Sylvester terminated Balvik's employment with the corporation.
- At the January 1986 shareholders' meeting, Sylvester used his majority voting power to amend the bylaws, reduce the number of directors, and remove Balvik and his wife from the board.
- The new board then removed Balvik from his position as vice-president.
- From the time of his employment termination, Balvik received no salary, dividends, or any other financial benefit from the corporation.
Procedural Posture:
- Elmer Balvik filed an action in district court against Weldon Corporation and Thomas Sylvester, seeking dissolution of the corporation or, alternatively, a buyout of his shares.
- The trial court found that Sylvester's conduct was 'oppressive' under the relevant state statute.
- The trial court entered a judgment ordering the dissolution of Weldon Corporation and appointed a liquidating receiver to dispose of its assets.
- Sylvester appealed the district court's judgment to the state's highest court.
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Issue:
Do the actions of a majority shareholder in a close corporation—including terminating the minority shareholder's employment, removing them from the board of directors, and preventing any return on their investment—constitute 'oppressive' conduct sufficient to justify judicial relief under a state statute?
Opinions:
Majority - Vande Walle, Justice
Yes, the cumulative actions of a majority shareholder that 'freeze out' a minority shareholder by defeating their reasonable expectations of employment, management participation, and return on investment constitute oppressive conduct justifying judicial relief. Oppressive conduct is an expansive term not limited to illegal or fraudulent acts. In close corporations, which resemble partnerships, shareholders reasonably expect to participate in management and derive income from employment, not just dividends. Here, Balvik reasonably expected continued involvement and income, as he had in the original partnership. Sylvester's actions of terminating Balvik's employment, removing him as a director and officer, and retaining all profits in the corporation effectively defeated these expectations, constituting a 'freeze-out.' While this oppression justifies judicial intervention, the remedy of forced dissolution is too drastic for a viable business. A more appropriate remedy is to order the corporation or the majority shareholder to purchase the minority shareholder's stock at fair value.
Analysis:
This case is a key illustration of judicial protection for minority shareholders in close corporations against 'freeze-out' schemes. It solidifies the 'reasonable expectations' test as a primary standard for identifying oppressive conduct, moving the analysis beyond just illegal or fraudulent acts to the fundamental understandings between the business venturers. The decision also emphasizes judicial preference for less drastic equitable remedies, like a forced buyout, over corporate dissolution. This preserves the business as a going concern while providing a fair exit for the oppressed minority shareholder, setting a precedent for resolving similar disputes without resorting to corporate termination.
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