This month CLG obtained a ruling in a three-year old shareholder oppression claim, obtaining a $12 million victory for their client plus attorney fees. The case stems from the ouster of a construction company’s founding shareholder, board member, and CEO. The plaintiff owned approximately 45% of the stock when the other two shareholders conspired to fire him without warning and remove him from all participation in the company.
Evidence at trial showed the motives for the ouster included the CEO addressing racial discrimination and reluctance to add a new shareholder who did not exhibit leadership qualities, among other reasons. The court’s decision noted there was no evidence the CEO did anything wrong or failed to perform in his role. The court found the other shareholders conspired to oust the CEO, meeting secretly to decide the CEO’s fate without any warning, discussion, or vote. The defendants admitted they terminated the CEO without cause and claimed their decision was solely for business reasons, namely his disagreement over admitting a new shareholder, but the court found relevant to its decision the fact the defendants never put the issue of admitting a new shareholder to vote and never even told the CEO that if he didn’t support making another employee a shareholder they would fire him. The court’s opinion also noted the defendants engaged in post-termination oppression including keeping the plaintiff on a large company line of credit while denying him access to the company’s financial information and reporting to the IRS $678,000 in income he never received in distributions but had to pay taxes on.
The defendants sought to enforce a buy-sell agreement the parties signed when they started the company ten years earlier, claiming they had the right to purchase his shares for adjusted book value as determined by the company’s CPA ($4.58 million). The court found the buy-sell agreement’s provisions ambiguous and further determined that due to the finding of oppression, the plaintiff was entitled to fair value for his shares in the amount of $8.53 million plus additional damages of $678,000 for reporting phantom income to the plaintiff. An earlier phase of the trial resulted in a jury verdict of $100,000 in damages against each of the defendant shareholders for breach of fiduciary duty.
The decision is a cautionary tale for shareholders who work together to fire their business partner without cause or warning. It also underscores the importance for having a clear buy-sell agreement. The trial team included Brian Chenoweth and Sandra Gustitus.
