Kaminsky Law attorney, Anton Kaminsky, secured a $2.5 million dollar victory for a minority owner of two Bucks County businesses in a shareholder oppression lawsuit after the minority shareholder was frozen out of and forcibly removed from the companies he founded without any payment for his interests.
After a four day bench trial, a Bucks County Judge found in favor of the Plaintiff in Duffield v. Legend Spine, LLC, et al., Bucks County Court of Common Pleas, Docket No. 2019-05685. Plaintiff filed suit after he was removed from a company he helped start, Legend Spine, without receiving anything of value for his 192 shares. Instead, the other four owners of the company divided his LLC membership interests among themselves.
This blog is a deep dive into the factual and legal findings of the lawsuit. Hopefully the takeaway for our small business owner audience is to help people understand what type of conduct might be shareholder oppression. Also, this blog will discuss what types of actions may be found to be a breach of the majority owners’ fiduciary duty to a company and its minority shareholders.
Factual Findings in the Minority Shareholder Oppression Lawsuit
After hearing testimony from Plaintiff, W. Duffield, the Defendants Karpowicz, Marinelli, and Black, and from Plaintiff’s expert, the Honorable Judge Robert J. Mellon, of the Bucks County Court of Common Pleas made findings of fact. According to the Court’s Opinion, the Judge found that as to the company Legend Spine, LLC (“Legend Spine”):
- The Majority Shareholders “act[ed] in self-interest and not the company’s best interest. After [Plaintiff’s] removal in August of 2018, [Defendants] Karpowicz and Marinelli’s compensation payments tripled.”
- “It was Karpowicz, Black, and Wagener voting yes to the larger compensation payments and driving Legend Spine further into the ground. It was the same members that decided not to develop the third product which could have generated money for Legend Spine, instead tripling their income for 2019.”
- After Plaintiff’s termination and removal, the Legend Spine membership interests ownership ledger was modified “removing W. Duffield as a Class A member and converting his 192 share[s] to increase the ownership interests of [Defendants] from 19.3 percent (192 shares) to 24 percent (241 shares).”
- In 2020, product development of a third medical device “was halted, a decision made by [the Majority Owners] because they claim testing (which would have been performed by Argovian at no cost) cost approximately $50,000. That same year, Marinelli and Karpowicz paid themselves three times what testing would have cost, $150,000.”
- “Marinelli stated that he could not forego a paycheck to launch the product; however, he expected that W. Duffield should forego any payment for his shares in Legend Spine … Marinelli admitted he put his ‘own personal interests ahead of the company.‘”
For the second company, a medical device testing company Argovian Technologies, LLC (“Argovian”), after reviewing testimony and evidence at trial, the Bucks County Judge found that:
- “After W. Duffield’s expulsion from Legend Spine, Argovian continued to perform all testing for Legend Spine. Legend Spine never compensated Argovian pre-expulsion; however, post-expulsion, W. Duffield demanded, pursuant to the Argovian Operating Agreement, that Legend Spine compensation Argovian, but Argovian Refused.”
- Because “[e]ach test performed cost between $35,000 to $60,000”, the company’s operating agreement required that each financial decision over $25,000 be made by unanimous vote, and W. Duffield objected to the nonpayment, the decision was in breach of the company’s operating agreement.
- The other members of Argovian also breached the operating agreement by “vot[ing] unanimously to sell assets totaling $125,000 and use $30,000 of the proceeds as payment towards [a loan to the company from W. Duffield].” However, after selling the assets, “Argovian never made this payment to the Duffield Loan and no vote or meeting was held to discuss rescinding the payment.”
- “Instead, Marinelli elected to pay debt that he and Karpowicz personally guaranteed. Since the payment of $30,000 to the Duffield Loan was over the decision-making threshold of $25,000, it required a unanimous vote to rescind or decide a different use of the money.”
Lawsuit Decided in Favor of the Oppressed Minority Shareholder
After trial and closing arguments, Judge Mellon concluded that “Defendants improperly expelled W. Duffield without giving proper notice of the meeting at which the vote occurred … in violation of the Legend Spine Operating Agreement.” The Court also concluded that “in further breach of Legend Spine Operating Agreement, the [Defendants] willfully and knowingly converted W. Duffield’s 192 Class A shares, for their personal gain. Defendants failed to pay W. Duffield fair market value for his shares.”
One of the key rulings in favor of the minority shareholder was a finding of oppression by the majority shareholders and that the Defendants’ conduct was a breach of the majority shareholders’ fiduciary duty to the minority shareholder. Specifically, the Court ruled that “[Defendants] conduct involving the improper expulsion is shareholder oppression and a breach of their fiduciary duty to [Plaintiff] as a minority.” Quoting Retina Assocs. of Greater Phila. v. Retinoviterous Assocs., the Court reiterated that:
Shareholder oppression can take many forms, and tactics employed against a minority shareholder to effect such a ‘freeze-out’ include, but are not limited to: generally oppressive conduct, the withholding of dividends, restricting or precluding employment in the corporation, paying excessive salaries to majority stockholders, withholding information relating to the operation of the corporation, appropriation of corporate assets, denying dissenting shareholders appraisal rights, failure to hold meetings and excluding the minority from a meaningful role in the corporate decision-making.Judge Mellon citing Retina Assocs. of Greater Phila. v. Retinoviterous Assocs., 176 A.3d 263, 275 (Pa. Super. 2017)).
Holding the Majority Shareholders Individually Liable for Shareholder Oppression
According to the Court, the Pennsylvania’s Limited Liability Company Act allows finding of personal liability against the Defendants. The Court reasoned that:
Pursuant to the LLC Act, the other members shall be held personally liable for monetary damages to the company because their willful misconduct was a breach of their duty of good faith and fair dealing in discharging the obligations under the Legend Spine Operating Agreement. The members decided, against the Legend Spine Operating Agreement, not to properly notify W. Duffield, not to give him a vote on his expulsion, and then decided not to pay him fair market value for his units. They did so knowingly and willfully. After the expulsion, they acted in self-interest and not in the best interest of the company paying themselves instead of developing product lines.
With respect to Argovian, the same is true. [Defendants’] conduct amounted to shareholder oppression.Duffield v. Legend Spine, LLC, et al., Bucks County Court of Common Pleas, Docket No. 2019-05685 (citing 15 Pa. C. S. § 8849).
Over $2.5 Million Shareholder Oppression and Breach of Fiduciary Duty Verdict in Favor of the Plaintiff and against all of the Defendants
Based on the evidence, the Court found in favor of Plaintiff and against Defendants on the claims of breach of contract, breach of fiduciary duty, and shareholder oppression involving Plaintiff’s minority shareholder interests in Legend Spine and awarded Plaintiff damages in the amount of $2,500,000 from claims involving Legend Spine, LLC.
The Court also found in favor of Plaintiff and against Defendants on the claims of breach of contract, breach of fiduciary duty, and shareholder oppression involving Plaintiff’s minority shareholder interests in Argovian Technologies, LLC. For Argovian, the Court ordered an accounting to determine and pay the balance of Plaintiff’s loan to Argovian and equal distributions to Plaintiff from Argovian from 2018 to the present.
The Court also awarded Plaintiff his attorney’s fees in the amount of $98,602.55.
What are the takeaways from this shareholder oppression lawsuit and what can majority shareholders do differently in their own company?
There are a few important takeaways from this lawsuit and the Court’s ruling. First, if a company removes a shareholder they have to do so in accordance with the company’s operating agreement. Unless the company’s agreement expressly allows taking an owner’s interests in the company for little to no value, it is usually a bad idea to take the interests without paying fair market value. Such actions could be shareholder oppression, a breach of the majority’s fiduciary duty to the minority, a breach of the operating agreement of the company, and conversion.
Second, if the majority is going to freeze out or lock out a minority shareholder that has been employed by the company since its formation, it should have a good reason and should clearly state that reason to the person as they are being removed / terminated. Then, after terminating them, the majority should proceed in accordance with their governing documents and be careful not to exclude the shareholder from decision making. If the agreement calls for a unanimous vote, the expelled shareholder still has the right to be present at the meeting and vote. Business owners should be careful to abide by corporate formalities and avoid breaching the company’s operating agreement.
Terminating someone without cause, terminating their access to company documents, records, performance, and corporate decision making–then trying to buy out (or take) their interests in the company for pennies on the dollar arguably frustrates their “reasonable expectations” in the company.
Such conduct could justify the minority shareholder seeking reinstatement via injunctive relief and can also be determined to be shareholder oppression as well as a breach of the decision makers’ fiduciary duty to the minority shareholder.
Next, if you have an internal company dispute, paying a large salary to the people in control while abandoning or deciding not to pursue corporate opportunities is risky, potentially self-interested, and can be determined to be in breach of the majority’s fiduciary duty to the company and the minority. If the company is doing well and can afford to sustain such salaries, then decides not to pursue business opportunities for legitimate business reasons, that might be acceptable. However, if the company can only afford the salaries or the business opportunities and elects to pay the salaries instead of attempting to grow the business, that’s different and more likely to be found to be improper.
Finally, before taking corporate actions, the majority should consult with an attorney and ensure that they are acting in accordance with (not in breach of) the agreement. At a minimum, consulting with an attorney and then acting allows the majority owners to say that they deferred to professionals and did what the professionals suggested. In this case, the Court noted that “[t]he majority members consulted legal counsel only after the expulsion but never discussed the value of [Plaintiff’s] shares.” As a result, the majority shareholders were unable to establish that they acted based on professional guidance.
What can I do if my minority shareholder rights in a company are being oppressed?
At Kaminsky Law, we pride ourselves on our aggressive and tireless representation of oppressed minority shareholders. One of our most active practice areas in Pennsylvania is Shareholder, Partner, and Member disputes. Our lawyers know that every situation is different, especially in the context of small businesses. Often times it is a family business, the operating agreement either doesn’t exist or is not very clear, and there are a ton of emotions. A small business is like a marriage, and a business dispute is like a divorce.
If you are a minority shareholder in a closely held company — one with few shareholders — and your rights to employment with the company, access to company information, ability to participate in meetings or company decisions, and rights to share in the profits from the company are being oppressed, we might be able to help.
For that reason, we offer free consultations to discuss your business issues or shareholder disputes. We take every consultation seriously and do our best to see whether and how we can help. If we take your case, we will fight tirelessly to try to resolve the dispute in our client’s favor. If you are interested in learning more, fill out our contact form or call 215-876-0800.
Want to Learn More About Shareholder Oppression and a Minority Shareholder’s Rights?
If you are interested in learning more, our founding attorney Anton Kaminsky has multiple videos about the topic:
- Intro to shareholder disputes video with definitions of key terms, the differences between shareholders, members, and partners, and the answer to the question of can a 50% shareholder be oppressed?
- A two part series about the “reasonable expectations” of a shareholder in a closely held company in Pennsylvania. The first video details the types of conduct that might freeze out or oppress the reasonable expectations of a minority shareholder. The second video is about the expectations that a business owner has in committing to a business and more details about shareholder oppression when two partners are 50/50.
- Video about obtaining an injunction in the context of a shareholder dispute or when a minority shareholder’s rights have been oppressed.
- Video explaining what happens if you don’t have a shareholder agreement in Pennsylvania.
We have also blogged extensively about shareholder oppression and obtaining relief in Pennsylvania on behalf of business owners for minority shareholder oppression. For more detailed explanations, links to cases, and definitions of key terms check out our blogs:
- Introduction to Shareholder Oppression in Pennsylvania
- Reasonable Expectations of a Minority Shareholder in a Closely Held Corporation
- The Difference Between Obtaining a Legal Remedy and an Equitable Remedy
- Obtaining Injunctive Relief to Maintain Status Quo while the Minority Oppression Lawsuit Proceeds
Contact Kaminsky Law About Minority Shareholder Oppression
If you have questions about how this court decision may apply to your situation, don’t hesitate to contract Kaminsky Law for a free consultation at 215-876-0800 or fill out a contact form here!
IMPORTANT DISCLAIMER: Any emphasis on key terms and findings is mine and not intended to indicate that those were the only findings in the Court’s decision. Other findings and facts are referenced in the Verdict and Opinion that are not discussed in this blog. The images are not intended to depict any specific person or event and are generated by Bing’s image generator. A copy of the Bucks County Trial Court Verdict and Opinion can be found on the Bucks County Prothonotary Case Search under the docket number listed above. The facts, events, and findings of this lawsuit are not intended to indicate, promise, or guarantee future performance by any Kaminsky Law lawyer. The results of one case do not indicate that the outcome for a similar case will be the same. Kaminsky Law makes no guarantees about results which vary depending on the specific facts and situation of each shareholder dispute.
It is also important to remember that even though the term “shareholder oppression” is used in this blog in Pennsylvania, the term is used interchangeably for corporations, partnerships, limited liability companies, and other types of business entities. Shareholder oppression can happen to members, partners, shareholders and the remedies and causes of action would be very similar for all of those entities in Pennsylvania.