Media Type: Alert
In the Maryland case of Bontempo v. Lare, 444 Md. 344 (2015), the state’s top court affirmed the use of the “reasonable expectations” view of shareholder oppression for closely held corporations, and confirmed the judicial authority to craft flexible equitable remedies in lieu of dissolution upon a finding of oppression.
This case brings to light several important considerations for business owners. First, in a corporation with multiple owners, it is recommended that the expectations of the shareholders be fully set forth in a shareholder agreement. In addition, if a shareholder is also an employee of the corporation, the expectations for employment should be specifically spelled out in an agreement to establish provisions governing if and how the employee-shareholder may be terminated and to specify the effect of termination of employment.
In Bontempo v. Lare, Clark Lare and his wife, Jodi, were the only two shareholders of Quotient, Inc. until David Bontempo was admitted as a 45% minority shareholder and given a small salary. Although there was no employment agreement, Bontempo was required to enter into a stockholders agreement which contained a buy-sell provision requiring him to sell his shares in Quotient if his employment was terminated for cause.
After 10 years of growth in the business, the relationship between Lare and Bontempo deteriorated, and Lare threatened to terminate Bontempo if he did not voluntarily withdraw. Bontempo refused and his employment was terminated. At the time, Bontempo remained a shareholder, as the buy-sell provision was not implicated without an indication that his employment was terminated for cause. Shortly thereafter, Bontempo filed a lawsuit requesting judicial dissolution of Quotient or, alternatively, employment-based relief, founded on the theory that Lare’s actions constituted oppression.
Defining Shareholder Oppression based on “Reasonable Expectations”
Under Section 3-413(b) of the Maryland Code, Corporations and Associations Article, “any stockholder entitled to vote in in the election of directors of a corporation may petition a court of equity to dissolve the corporation… [when] the acts of the directors or those in control of the corporation are illegal, oppressive or fraudulent.” Lare argued pursuant to this Section that he was oppressed, and that court should dissolve Quotient. The Circuit Court agreed with Bontempo that Lare’s threats were oppressive by relying on the definition of shareholder oppression set forth in Edenbaum v. Schwarcz-Osztreicherne, 165 Md. App. 233 (2005), but refused to dissolve the corporation in accordance with the Maryland Code.
Edenbaum, a decision of the intermediate Court of Special Appeals, recognized that oppression was not defined by the statute or by the common law of Maryland. After examining the decisions of certain other states, the Edenbaum court declared that “oppression” should be defined in terms of the “‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise” Edenbaum v. Schwarcz-Osztreicherne. The Edenbaum court also declared that, upon a finding of oppression, strict dissolution under the statute would not be required. Instead, the court could craft alternative equitable remedies in lieu of dissolution.
Bontempo v. Lare: From Maryland Circuit Court to Maryland Court of Appeals
Applying Edenbaum, the Circuit Court in Bontempo found that “Bontempo's reasonable expectations were that this start-up company would employ him, that he would participate (as a stockholder) in the company's profit distributions and that he would not be terminated for subjective reasons.” The Circuit Court found that “particularly [Mr. Lare’s] threat to fire Mr. Bontempo if he did not voluntarily resign and sell his shares, met the standard for oppressive conduct.” Bontempo v. Lare, 217 Md. App. 81, 102 (2015) (quoting the trial court).
Rather than ordering dissolution, the Circuit Court ordered a full accounting of the Lares’ misappropriated funds and payment of unpaid distributions. Although satisfied with the finding of oppression, Bontempo appealed the court’s remedy.
On appeal, the Court of Special Appeals affirmed the use of the reasonable expectations test and agreed that Mr. Lare’s conduct was oppressive. Although the award was modified such that the Quotient would be made whole by the Lares’ misappropriations, the Court of Special Appeals agreed that the remedy of dissolution was too severe for a successful ongoing company, and that employment-based relief was improper without an oral or written agreement setting forth a reasonable expectation of continued employment. As a result, Bontempo appealed again, asking the state’s highest court to consider, in part, whether the Circuit Court erred in declining to order employment-related relief.
The Court of Appeals first affirmed the test for oppression, agreeing with the Circuit Court and Edenbaum that the “measuring stick” for shareholder oppression should be defined by “the shareholder’s reasonable expectations upon becoming an owner of the company. Bontempo, 444 Md. at 349. Next, the Court agreed that “dissolution is not the only remedy if oppression is found.” Id. at 370. However, even though the court may craft alternative equitable remedies in lieu of dissolution, a court acting under the dissolution statute “is not required to match its remedy to an expectation of the minority shareholder.” Id. at 369.
Although it is optimal for business owners to enter into shareholder agreements prior to formation, business owners are encouraged to have their agreements reviewed regularly in order to ensure that their agreements reflect changes which take place over time in the business, as well as changes in the law, such as the implications of Bontempo.
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