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Shareholder Oppression – Reasonable Expectations of Owning a Small Business

Reasonable Expectations Defined

There are many things that fall under the umbrella of shareholder oppression in Pennsylvania. The simple definition of shareholder oppression is when one shareholder uses their power to oppress or take away the rights of another shareholder in a business that they own together. In this section we will focus on the reasonable expectations of a shareholder in a closely held corporation. Or in other words, what a small business owner can expect when partnering with someone else to run a company.

Reasonable expectations as a shareholder in a close corp. Share in the profits of the business, participate in management decisions, buying out shares at market value, company account access, employment security, earning a paycheck from the business, a role in management, participate in financial decisions
Chart of reasonable expectations of a shareholder in a closely held corporation in Pennsylvania

A starting point to understanding shareholder oppression is being able to identify when a shareholders reasonable expectations are frustrated. You may ask yourself, well what does that mean? The image above lists some of the reasonable expectations that a shareholder or owner of a closely held company would have. If you are restricted by your business partner in some of the above listed items, you may be experiencing shareholder oppression. The YouTube video below, part of our Legal Ease segment, goes into the importance of knowing the reasonable expectations so that if they are “frustrated” or trampled by your business partner, you can contact a Philadelphia business lawyer as soon as possible.

Shareholder Oppression

As we have said previously in our introduction to shareholder disputes article, when we speak about shareholder oppression we are using the term interchangeably with membership oppression and partnership oppression. It simply means one of the business partners is treating the other business partner wrongfully.

In each relationship there may be a different specific facts, but the general idea is usually the same. One shareholder begins to freeze out another shareholder from the business. This can look like losing access to your income, losing decision making ability in the company, being locked out of bank accounts, and being isolated from oversight of the employees of the business.

Here are a few definitions and examples of shareholder oppression from Pennsylvania’s Courts and a definition of reasonable expectations from the Pennsylvania Superior Court:

  • “Oppressive actions refer to conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise.” Gee v. Blue Stone Heights Hunting Club, Inc., 604 A.2d 1141, 1145 (Pa.Cmwlth.1992) (adopting rationale of New York state appellate courts).
  • More recently, this Court announced our adoption of the “reasonable expectations” approach to determining oppressive conduct. See Ford v. Ford, 878 A.2d 894, 900 (Pa.Super.2005). Thus, oppressive conduct is measured in light of the effect on a minority’s shareholder’s reasonable expectations.
  • Those expectations may include things such as their employment in the corporation, a role in management, or a share of the profits of the enterprise. See, e.g., Viener v. Jacobs, 834 A.2d 546, 557 (Pa.Super.2003).

Frustrating Reasonable Expectations

The video below goes more into the details of what it may look like to have the reasonable expectations frustrated. We also discuss the answer to the commonly asked question, “Can a 50% owner of a business be subject to shareholder oppression?”

Contact a lawyer!

It is important to contact a lawyer because when a shareholder is being frozen out of the company they are in a vulnerable position and must act quickly. The other shareholders often try to squeeze the oppressed shareholder out for a significantly lower price than their shares are worth. They try to get the frozen out shareholder to accept pennies on the dollar–because they are already excluded from the business.

For this reason Pennsylvania law entitles each shareholder to get an accounting and valuation of the business to make sure that they will receive fair market value for their shares. It is important to consult with a Philadelphia shareholder oppression lawyer to protect your rights and ensure that your reasonable expectations are not being frustrated.

If you feel that you have found yourself in a situation where your rights as a shareholder are being oppressed, Kaminsky Law is happy to help. One of the largest focuses of our practice is helping our clients practically and cost effectively resolve business disputes.

We know how difficult it can be to advocate for your self to make sure that you get the financial outcome that you were expecting. Call us at 215-876-0800 or fill out a contact form!

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Rebecca Belenky
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