Business Law Update: Michigan Supreme Court’s May 15, 2017 Decision on Minority Oppression

There are relatively few court opinions covering the Michigan Limited Liability Company Act. There have been even less on the issue of minority oppression claims.

It has been almost 3 years since the Michigan Supreme Court issued its Opinion in the Madugula v Taub case on Michigan’s shareholder/member oppression statutes.

The Madugula clarified that a claimant is not entitled to a jury a trial under the Act; and breach of a Shareholder/Operating Agreement can be evidence of “oppressive” conduct.

On May 15, 2017 the Michigan Supreme Court issued its Opinion in Frank, et al v. Linkner, et al.

In summary, the Supreme Court held:

that MCL 450.4515(1)(e) provides alternative statutes of limitations, one based on the time of discovery of the cause of action and the other based on the time of accrual of the cause of action; and

That a cause of action for LLC member oppression accrues at the time an LLC manager has substantially interfered with the interests of a member as a member, even if that member has not yet incurred a calculable financial injury. See Frank, id. page 1.

The facts of Frank are admittedly, interesting (and unfortunate if you are the Plaintiffs):

Facts:

Defendant ePrize was founded by defendant Joshua Linkner in 1999 as a Michigan LLC specializing in online sweepstakes and interactive promotions.

Plaintiffs are former employees of ePrize who acquired ownership units in ePrize.

Plaintiffs allege Linkner orally promised them that their interests in ePrize would never be diluted or subordinated.

In 2005, plaintiffs’ shares in ePrize were converted into shares in ePrize Holdings, LLC.

In 2007, ePrize ran into financial difficulties and required an infusion of cash.

To remedy this problem, ePrize obtained $28 million in loans in the form of “B Notes” from various defendantmembers of ePrize and other investors;

plaintiffs were not invited to participate in these investments.

In 2009, ePrize remained struggling to meet its loan obligations and therefore issued new “Series C Units.”

These units were offered to various investors, including those who had obtained B Notes.

In exchange for the Series C Units, investors were required, amo
ng other things, to make capital contributions, guarantee a portion of a $14.5 million loan from Charter One Bank, and convert their B Notes into “Series B Units.”

On August 20, 2012, ePrize sold substantially all of its assets and, pursuant to the Operating Agreement, distributed nearly $100 million in net proceeds to the holders of Series C and Series B Units.

Plaintiffs received nothing for their common shares.

Procedural History

Plaintiffs sued on April 19, 2013 alleging among other claims, minority oppression under MCL 450.4515. The trial court dismissed the claims, indicating that they were “untimely” under the 3 year statute of limitation period. The Court of Appeals reversed. This matter then went to the Supreme Court.

In General – Michigan Minority Oppression Statute

Michigan law provides a cause of action against the shareholders/members who are in control of a company and oppressing minority owners:

Minority Shareholder Oppression, MCL 450.1489 (Minority Member Oppression, MCL 450.4515)

“A shareholder may bring an action…to establish that the acts of the directors or those in control of the corporation are:

illegal;

fraudulent;

or willfully unfair and oppressive to the corporation or to the shareholder.”

“If the shareholder establishes grounds for relief, the circuit court may make an order or grant relief as it considers appropriate, including, without limitation,
an order providing for any of the following:

(a) The dissolution and liquidation of the assets and business of the corporation.

(b) The cancellation or alteration of a provision contained in the articles of incorporation, an amendment of the articles of incorporation, or the bylaws of the corporation.

Therefore, if a court finds that those in control of the business committed misconduct against a minority owner amounting to “oppression”, the Court has broad discretion to create the type of relief it deems is best.

Back to the Supreme Court’s Decision in Frank…

a. Statute of Limitations

The Supreme Court agreed with the Court of Appeals that:

“MCL 450.4515(1)(e) contains two alternative statutes of limitations:”

1. (2 years) predicated upon discovery of the cause of action and

2. the other (3 years) predicated upon accrual of the cause of action. Id. at pg 6.

The Supreme Court clarified that under the statute “A plaintiff has two years from the time he or she ‘discovers or reasonably should have discovered the cause of action” to bring a claim [under the minority oppression statute]”. Id pg 13. “…a plaintiff cannot bring a claim three years after accrual of the cause of action, even if he or she did not discover and reasonably would not have discovered the cause of action during that period.”

b. when does an oppression claim accrue?

The Plaintiffs/minority members argued that their claims “did not accrue until they first incurred a calculable financial injury after ePrize sold substantially all of its assets in 2012.” Id. pg 16. They reasoned that no monetary damages occurred until the company was liquidated. Id.

The Supreme Court, however reasoned that the “plaintiffs’ argument conflates monetary damages with ‘harm'”. The Court held that:

the actionable harm for a member-oppression claim under MCL 450.1515 consists of actions taken by the managers that “substantially interfere with the interests of the member as a member,” and monetary damages constitute just one of many potential remedies for the harm.

Therefore, the Court held that :the Court of Appeals erred by focusing on the availability of monetary damages, rather than on when plaintiffs incurred ‘harm’.” The Court reversed the Court of Appeals on this issue. Id. 17.

“Once a plaintiff proves that a manager engaged in an action or series of actions that substantially interfered with his or her interest as a member, the “harm” has been incurred, and therefore the claim has accrued.” Id.

Application

In application, the Supreme Court therefore found that the alleged harm occurred when the minority members’ interest were subordinated (in 2009) by amendment of the operating agreement and not when the sale occurred (in 2012). Id. at 20.

So, unless plaintiffs can show fraudulent concealment, Plaintiffs’ claims for monetary damages are barred.

Take away for Business owners/Investors/Entrepreneurs:

1. Get an attorney involved before the business relationship begins and clearly document the business relationship, especially your shareholder/operating agreement. That will contain the exit strategy and relevant buy-out language. Further, any conduct the parties agree to in their shareholder/operating agreement will not be deemed “oppressive”. However, a breach of the agreement, may deemed interference with your rights sufficient to constitute “oppression” however, this is based on a highly fact-intensive analysis.

2. If you believe you are being frozen out of control/profits in a business – do not wait. The Michigan Supreme Court has held that your claim accrues when the harm occurs. Learn from the Frank Decision. Michigan law gives you broad remedies, including the minority shareholder/member oppression statutes.

Questions?

Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

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