Court Rules on Claim of Oppression Against Minority Shareholder
Iowa law (Iowa Code §504) allows the formation of “mutual-benefit corporations.” In this case, six individuals formed a hunting club “for the purpose of amusement and promotion of athletics, not for profit, among its members.” Basically, the object of the corporation was to promote hunting, fishing, trapping and related activities. The corporation acquired nearly 300 acres of bottom-ground since its formation to conduct its activities. Eventually, one member of the club claimed that the remaining four members acted “oppressively” when they amended the corporation’s governing documents and admitted a new member. The complaining member (plaintiff) asked the court to cancel the new member’s admission and dissolve the hunting club altogether.
The club’s membership had declined to five members – that was the minimum number allowed before dissolution was to occur according to the club’s articles of incorporation and bylaws. The club discussed admitting new members, but never did so. In 2008, the club hired an attorney to review the governing documents and subsequently voted to change the bylaws and reduce the requirement to admit new members from a unanimous vote to a ¾’s vote. The plaintiff challenged this amendment and claimed the group’s conduct was oppressive. The remaining members (without the consent of the plaintiff) voted to approve a new member. The group also voted to change other provisions of the Bylaws and Articles of Incorporation, including a change to the distribution of the corporation’s assets upon dissolution. Additionally, the group voted to no longer mandate a minimum number of directors. The plaintiff also complained that this conduct was oppressive.
The trial court held that the majority had the authority to amend the corporate documents by less than a unanimous vote, that their conduct was not oppressive, and that the plaintiff had not been damaged. The trial court declined to remove the new member or dissolve the corporation.
On appeal, the court noted that corporate directors owe fiduciary duties of care and loyalty to one another, and that oppression occurs when the majority acts to “freeze-out” the minority. Key to determining oppressive conduct is the “reasonable expectation” of the minority. If the majority shareholders knew, or should have known, that they were damaging the minority then the minority may have a valid claim for oppression. But, the court reasoned that was not present in this case. The court noted that each member of the club owned the same amount of stock and that the plaintiff’s concerns were speculative. The court also pointed out that the plaintiff could participate in any vote on admission or changes to the by-laws and articles, and there was no evidence of collusion amongst the remaining members against the plaintiff. The court also refused to cancel the new member’s affiliation with the group. Jochimsen v. Wapsi Hunting Club, Inc, et al., No. 1-305/10-1430, 2011Iowa App. LEXIS 658 (Iowa Ct. App. Jul. 13, 2011).