H. Joel Newman, PLLC Business Litigation Attorney

Breach Of Contract

The Michigan Supreme Court held in Madigula v Taub that Operating Agreements are contracts. Members of an LLC can sue other members and managers for breach of contract if they fail to perform as set forth in the Operating Agreement. Other very important contracts enforceable in the Corporate and Limited Liability Company governance context are Buy-Sell Agreements and Employment Contracts.
Bylaws and Operating Agreements
Buy-Sell Agreements

Breach Of Fiduciary Duty

A fiduciary duty is an obligation to act in the best interest of another party. When one person does agree to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. Officers, Directors or others acting in control of a Corporation, managers and members of an LLC, partners in a Partnership and general partners in a Limited Partnership all owe fiduciary duties to the Corporation/LLC and to the Shareholders/Members as well. The acts comprising oppression are generally breaches of fiduciary duty as well. Breaches of fiduciary duty involve those in control either acting against the interest of the Company, usually in their own self-interest, or failure to act to protect the Company. Common examples of breaches of fiduciary duties include:

1. Self-interested transactions. This category includes, among others:
a. Purchasing or selling services or products to or from companies in which the Director or Manager has a direct or indirect interest. One frequent example is where the director or Manager is the Company's landlord and charges excessive rent;
b. Paying oneself excessive salary, bonus or distributions;
c. Any unauthorized use of Company funds or property;
d. Competing with the company;
e. Nepotism in employment and/or customer/vendor relationships;
f. Other actions designed to divert or misstate earnings.

2. Freeze-outs. A freeze-out is any action or series of actions which tend to deprive a minority owner of the benefits of ownership. This could include failure to pay proper dividends or distributions; termination of employment; exclusion from business decisions; exclusion from financial or other business information and any acts of oppression, breaches of fiduciary duty, breaches of the Corporate Bylaws, LLC Operating Agreements and other breaches of shareholder rights or member rights.
3. Neglect of duty. Any breach of the duty to operate the Company in a prudent manner.

Minority Shareholder Oppression, Minority Member Oppression

Minority Shareholder Oppression, Minority Member Oppression is broadly defined in the Michigan Business Corporation Act: 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. The Michigan Limited Liability Company Act contains very similar language. Michigan Courts have very broad powers to remedy Oppression, including ordering the Company or oppressive actor to purchase the minority's interest at fair market value without discounts; dissolution of the Company; appointment of a Receiver, canceling improper actions, disgorgement of improperly taken assets, and the award of money damages.

Common examples of Shareholder Oppression:

• • Refusing to declare dividends or distributions
• • Attempting a squeeze-out/freeze-out
• • Physically preventing entrance to business premises
• • Denying access to corporate records and books
• • Wrongful termination of employment
• • Engaging in unfair self-interested transactions as a customer or vendor of the company
• • Nepotism in employment
• • Excessive compensation
• • Failure to conduct proper votes
• • Embezzlement
• • Improper competition
• • Any other actions that breach the Defendant's fiduciary duties to the minority owner

Summary examples of Oppression cases.

Buy/Sell Agreements

Buy-Sell Agreements frequently provide the only practical manner in which minority owners can obtain a fair price for their ownership interest. Accordingly, these agreements are critically important. Among other things, a Buy-sell Agreement should:

1. Describe triggering events
2. Provide for an agreed upon value or valuation formula
3. Provide payment and security terms

Buy-Sell Agreements.

Freeze Out or Force Out

Actions taken by those in control which deprives the minority owners of the benefits of ownership and pressures them to sell their stakes in the company, usually for a greatly reduced price. Common examples of Freeze Out or Force Out:

• • Termination of minority shareholder's employment
• • Diversion of profits
• • Refusal to declare dividends or distributions
• • Refusal to share financial information
• • Preventing the minority owner from voting or participating in management decisions

Fraud

Fraud in this context is a false representation of a fact made either with knowledge of its falsity or made recklessly. Silent fraud is the failure to disclose material facts where one has a duty of disclosure. Those in control of closely held corporations or limited liability companies have such a duty.

Dissolution Disputes

Dissolution is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed. Michigan courts have the power to dissolve a Company where oppression is found and the court determines dissolution is appropriate under the circumstances.
How To Avoid These Common Shareholder Disputes.

Related Statutes
Corporations

Shareholder Oppression
MCL 450.1489
Action by shareholder.
Sec. 489.

1. A shareholder may bring an action in the circuit court of the county in which the principal place of business or registered office of the corporation is located 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.
(c) The cancellation, alteration, or injunction against a resolution or other act of the corporation.
(d) The direction or prohibition of an act of the corporation or of shareholders, directors, officers, or other persons party to the action.
(e) The purchase at fair value of the shares of a shareholder, either by the corporation or by the officers, directors, or other shareholders responsible for the wrongful acts.
(f) An award of damages to the corporation or a shareholder. An action seeking an award of damages must be commenced within 3 years after the cause of action under this section has accrued, or within 2 years after the shareholder discovers or reasonably should have discovered the cause of action under this section, whichever occurs first.

2. No action under this section shall be brought by a shareholder whose shares are listed on a national securities exchange or regularly traded in a market maintained by 1 or more members of a national or affiliated securities association.
3. As used in this section, "willfully unfair and oppressive conduct" means a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder. Willfully unfair and oppressive conduct may include the termination of employment or limitations on employment benefits to the extent that the actions interfere with distributions or other shareholder interests disproportionately as to the affected shareholder. The term does not include conduct or actions that are permitted by an agreement, the articles of incorporation, the bylaws, or a consistently applied written corporate policy or procedure.

History: Add. 1989, Act 121, Eff. Oct. 1, 1989 ;-- Am. 1997, Act 118, Imd. Eff. Oct. 24, 1997 ;-- Am. 2001, Act 57, Imd. Eff. July 23, 2001 ;-- Am. 2006, Act 68, Imd. Eff. Mar. 20, 2006. Copyright 2015 Legislative Council, State of Michigan

Shareholder Inspection Rights
MCL 450.1487
Request for balance sheet, statement of income, and statement of source and application of funds; inspection of records; court order; definition; holder of voting trust certificate deemed shareholder.
Sec. 487.

1. Upon written request of a shareholder, a corporation shall mail to the shareholder its balance sheet as at the end of the preceding fiscal year; its statement of income for the fiscal year; and, if prepared by the corporation, its statement of source and application of funds for the fiscal year.
2. Any shareholder of record, in person or by attorney or other agent, shall have the right during the usual hours of business to inspect for any proper purpose the corporation's stock ledger, a list of its shareholders, and its other books and records, if the shareholder gives the corporation written demand describing with reasonable particularity his or her purpose and the records he or she desires to inspect, and the records sought are directly connected with the purpose. A proper purpose shall mean a purpose reasonably related to such person's interest as a shareholder. The demand shall be delivered to the corporation at its registered office in this state or at its principal place of business. In every instance where an attorney or other agent shall be the person who seeks to inspect, the demand shall be accompanied by a power of attorney or other writing which authorizes the attorney or other agent to act on behalf of the shareholder.
3. If the corporation does not permit an inspection within 5 business days after a demand has been received in compliance with subsection (2), or imposes unreasonable conditions upon the inspection, the shareholder may apply to the circuit court of the county in which the principal place of business or registered office of the corporation is located for an order to compel the inspection. If the shareholder seeks to inspect the corporation's books and records other than its stock ledger or list of shareholders, he or she shall first establish that he or she has complied with this section respecting the form and manner of making demand for inspection of the documents, that the inspection he or she seeks is for a proper purpose, and that the documents sought are directly connected with the purpose. If the shareholder seeks to inspect the corporation's stock ledger or list of shareholders and has established compliance with this section respecting the form and manner of making demand for the inspection of the documents, the burden of proof shall be upon the corporation to establish that the inspection that is sought is for an improper purpose or that the records sought are not directly connected with the person's purpose. The court may, in its discretion, order the corporation to permit the shareholder to inspect the corporation's stock ledger, a list of shareholders, and its other books and records on conditions and with limitations as the court may prescribe and may award other or further relief as the court may consider just and proper. The court may order books, documents and records, pertinent extracts, or duly authenticated copies, to be brought within this state and kept in this state upon terms and conditions as the court may prescribe.
4. A director shall have the right to examine any of the corporation's books and records for a purpose reasonably related to his or her position as a director. The director may apply to the circuit court of the county in which the principal place of business or registered office of the corporation is located for an order to compel the inspection. The court may, in its discretion, order the corporation to permit the director to inspect any and all books and records, on conditions and with limitations as the court may prescribe and may award other and further relief as the court may consider just and proper.
5. If the court orders inspection of the records demanded under subsection (3) or (4), it shall also order the corporation to pay the shareholder's or director's costs, including reasonable attorney fees, incurred to obtain the order unless the corporation proves that it failed to permit the inspection in good faith because it had a reasonable basis to doubt the right of the shareholder or director to inspect the records demanded.
6. As used in this section, “the right to inspect records includes the right to copy and make extracts from the records and, if reasonable, the right to require the corporation to supply copies made by photographic, xerographic, or other means. The corporation may require the shareholder to pay a reasonable charge, covering the costs of labor and material, for copies of the documents provided to the shareholder.
7. A holder of a voting trust certificate representing shares of the corporation is deemed a shareholder for the purpose of this section and section 485.

History: 1972, Act 284, Eff. Jan. 1, 1973 ;-- Am. 1989, Act 121, Eff. Oct. 1, 1989. Copyright 2015 Legislative Council, State of Michigan

Self-Dealing
MCL 450.1545a
Interest of director or officer in transaction; compensation of directors.
Sec. 545a.

1. A director or officer shall discharge his or her duties as a director or officer including his or her duties as a member of a committee in the following manner:
(a) In good faith.
(b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
(c) In a manner he or she reasonably believes to be in the best interests of the corporation.

2. In discharging his or her duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by any of the following:
(a) One or more directors, officers, or employees of the corporation, or of a business organization under joint control or common control, whom the director or officer reasonably believes to be reliable and competent in the matters presented.
(b) Legal counsel, public accountants, engineers, or other persons as to matters the director or officer reasonably believes are within the person's professional or expert competence.
(c) A committee of the board of which he or she is not a member if the director or officer reasonably believes the committee merits confidence.

3. A director or officer is not entitled to rely on the information set forth in subsection (2) if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) unwarranted.
4. An action against a director or officer for failure to perform the duties imposed by this section shall be commenced within 3 years after the cause of action has accrued, or within 2 years after the time when the cause of action is discovered or should reasonably have been discovered, by the complainant, whichever occurs first.

History: Add. 1989, Act 121, Eff. Oct. 1, 1989. Copyright 2015 Legislative Council, State of Michigan

Fiduciary Duties Of Corporate Directors and Officers
MCL 450.1541a
Director or officer; manner of discharging duties; reliance on information, opinions, reports, or statements; action against director or officer; limitations.
Sec. 541a.

1. A transaction in which a director or officer is determined to have an interest shall not, because of the interest, be enjoined, set aside, or give rise to an award of damages or other sanctions, in a proceeding by a shareholder or by or in the right of the corporation, if the person interested in the transaction establishes any of the following:
(a) The transaction was fair to the corporation at the time entered into. (b) The material facts of the transaction and the director's or officer's interest were disclosed or known to the board, a committee of the board, or the independent director or directors, and the board, committee, or independent director or directors authorized, approved, or ratified the transaction. (c) The material facts of the transaction and the director's or officer's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction.
2. For purposes of subsection (1)(b), a transaction is authorized, approved, or ratified if it received the affirmative vote of the majority of the directors on the board or the committee who had no interest in the transaction, though less than a quorum, or all independent directors who had no interest in the transaction. The presence of, or a vote cast by, a director with an interest in the transaction does not affect the validity of the action taken under subsection (1)(b).
3. For purposes of subsection (1)(c), a transaction is authorized, approved, or ratified if it received the majority of votes cast by the holders of shares who did not have an interest in the transaction. A majority of the shares held by shareholders who did not have an interest in the transaction constitutes a quorum for the purpose of taking action under subsection (1)(c).
4. Satisfying the requirements of subsection (1) does not preclude other claims relating to a transaction in which a director or officer is determined to have an interest. Those claims shall be evaluated under principles of law applicable to a transaction in which a director or officer does not have an interest.
5. The board, by affirmative vote of a majority of directors in office and irrespective of any personal interest of any of them, may establish reasonable compensation of directors for services to the corporation as directors or officers, but approval of the shareholders is required if the articles of incorporation, bylaws, or another provision of this act requires that approval. Transactions pertaining to the compensation of directors for services to the corporation as directors or officers shall not be enjoined, set aside, or give rise to an award of damages or other sanctions in a proceeding by a shareholder or by or in the right of the corporation unless it is shown that the compensation was unreasonable at the time established.

History: Add. 1989, Act 121, Eff. Oct. 1, 1989 ;-- Am. 2008, Act 402, Imd. Eff. Jan. 6, 2009. Copyright 2015 Legislative Council, State of Michigan

Related Statutes
Limited Liability Companies
Member Oppression

MICHIGAN LIMITED LIABILITY COMPANY ACT (EXCERPT)
Act 23 of 1993 450.4515 Action in circuit court; grounds; order or grant of relief; "willfully unfair and oppressive conduct" defined.Sec. 515.

1. A member of a limited liability company may bring an action in the circuit court of the county in which the limited liability company's principal place of business or registered office is located to establish that acts of the managers or members in control of the limited liability company are illegal or fraudulent or constitute willfully unfair and oppressive conduct toward the limited liability company or the member. If the member establishes grounds for relief, the circuit court may issue an order or grant relief as it considers appropriate, including, but not limited to, an order providing for any of the following:
(a) The dissolution and liquidation of the assets and business of the limited liability company.
(b) The cancellation or alteration of a provision in the articles of organization or in an operating agreement.
(c) The direction, alteration, or prohibition of an act of the limited liability company or its members or managers.
(d) The purchase at fair value of the member's interest in the limited liability company, either by the company or by any members responsible for the wrongful acts.
(e) An award of damages to the limited liability company or to the member. An action seeking an award of damages must be commenced within 3 years after the cause of action under this section has accrued or within 2 years after the member discovers or reasonably should have discovered the cause of action under this section, whichever occurs first.

2. As used in this section, "willfully unfair and oppressive conduct" means a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the member as a member. Willfully unfair and oppressive conduct may include the termination of employment or limitations on employment benefits to the extent that the actions interfere with distributions or other member interests disproportionately as to the affected member. The term does not include conduct or actions that are permitted by the articles of organization, an operating agreement, another agreement to which the member is a party, or a consistently applied written company policy or procedure.

History: Add. 1997, Act 52, Imd. Eff. July 1, 1997 ;-- Am. 2002, Act 686, Imd. Eff. Dec. 30, 2002 ;-- Am. 2010, Act 290, Imd. Eff. Dec. 16, 2010. Copyright 2015 Legislative Council, State of Michigan

Member Inspection Rights
MCL 450.4503
Members; obtaining certain financial statements and tax returns; inspecting and copying records; obtaining other information; formal accounting of company's affairs.
Sec. 503.

1. Upon written request of a member, a limited liability company shall send a copy of its most recent annual financial statement and its most recent federal, state, and local income tax returns, and any other returns or filings the limited liability company has submitted or is required to submit to any federal, state, local, or other governmental taxing authority, to the member by mail or electronic transmission.
2. Upon reasonable request, a member may obtain true and full information regarding the current state of a limited liability company's financial condition.
3. Upon reasonable written request and during ordinary business hours, a member or the member's designated representative may inspect and copy, at the member's expense, any of the records a limited liability company is required to maintain under section 213, at the location where the records are kept.
4. Upon reasonable written request, a member may obtain other information regarding a limited liability company's affairs or may inspect, personally or through a representative and during ordinary business hours, other books and records of the limited liability company, as is just and reasonable.
5. A member may have a formal accounting of a limited liability company's affairs, as provided in an operating agreement or whenever circumstances render it just and reasonable.

History: 1993, Act 23, Eff. June 1, 1993 ;-- Am. 1997, Act 52, Imd. Eff. July 1, 1997 ;-- Am. 2002, Act 686, Imd. Eff. Dec. 30, 2002 ;-- Am. 2010, Act 290, Imd. Eff. Dec. 16, 2010. Copyright 2015 Legislative Council, State of Michigan

Manager Fiduciary Duties
MCL 450.4404
Managers; duties; action for failure to perform duties.
Sec. 404.

1. A manager shall discharge the duties of manager in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company.
2. In discharging the manager's duties, a manager may rely on information, opinions, reports, or statements, including, but not limited to, financial statements or other financial data, if prepared or presented by any of the following:
(a) One or more other managers or members or employees of the limited liability company whom the manager reasonably believes to be reliable and competent in the matter presented.
(b) Legal counsel, public accountants, engineers, or other persons as to matters the manager reasonably believes are within the person's professional or expert competence.
(c) A committee of managers of which the manager is not a member if the manager reasonably believes the committee merits confidence.

3. A manager is not entitled to rely on the information, opinions, reports, or statements described in subsection (2) if the manager has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) unwarranted.
4. A manager is not liable for an action taken as a manager or the failure to take an action if the manager performs the duties of the manager's office in compliance with this section.
5. Except as otherwise provided in an operating agreement or by vote of the members pursuant to section 502(4) and (7), a manager shall account to the limited liability company and hold as trustee for it any profit or benefit derived by the manager from any transaction connected with the conduct or winding up of the limited liability company or from any personal use by the manager of its property.
6. An action against a manager for failure to perform the duties imposed by this act shall be commenced within 3 years after the cause of action has accrued or within 2 years after the cause of action is discovered or should reasonably have been discovered by the complainant, whichever occurs first.

History: 1993, Act 23, Eff. June 1, 1993 ;-- Am. 1997, Act 52, Imd. Eff. July 1, 1997 ;-- Am. 2010, Act 290, Imd. Eff. Dec. 16, 2010. Copyright 2015 Legislative Council, State of Michigan

FOR A COMPLETE LIST OF SHAREHOLDER DISPUTES AND RELATED STATUTES CLICK HERE.