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Help, Help, I’m Being Oppressed - Bontempo v. Lare

Fans of the comedy classic Monty Python and the Holy Grail will recall the scene where the peasant Dennis confronts King Arthur, argues with him, and eventually exclaims, “help, help, I’m being repressed.” As the dispute escalates, Dennis urges others to “come and see the violence inherent in the system.” Well, unlike peasants in medieval England, minority shareholders in Maryland do not have to be concerned about being “repressed.” But they might have to worry about being “oppressed,” and they might seek help addressing what they see as the inequities inherent in their situation.

In Bontempo v. Lare, 444 Md. 344 (2015), the Court of Appeals addressed what it means to be an “oppressed” shareholder and what remedies are available to Maryland shareholders who find themselves in that situation. The Court followed the example of other courts that measure “oppression by looking to the ‘reasonable expectations’ of minority shareholders at the time they join the venture.” Id. at 348. The Court also joined courts from other jurisdictions that “have held that a court of equity may employ other equitable tools, short of dissolution, to remedy shareholder oppression.” Id.

The business relationship that ultimately led to the Court’s decision began innocently enough. Clark Lare and his wife, Jodi, formed a company, Quotient, Inc., and Clark recruited David Bontempo to join that venture. David left his job with another company, joined Quotient as Vice-President of Business Development, and became a forty-five percent shareholder. Things went well for a while, but, as often happens, the parties’ relationship eventually soured. David raised several concerns, including Clark’s and Jodi’s use of Quotient’s corporate funds to pay their personal expenses. Unable to agree to buyout of David’s shares, Clark fired David as an employee. David then resigned as an officer and director, but he remained a shareholder in Quotient.

Litigation ensued. Along with other claims brought by David, he alleged that Clark and Jodi had engaged in “illegal, fraudulent, and oppressive” conduct aimed at him as the minority shareholder, for which he sought “a panoply of equitable relief.” Id. at 356. As to that claim, the circuit court limited the relief available to David, ruling that he was not entitled to recover “employment-related damages,” such as past salary that he lost when he was fired and salary that he expected to earn in the future. Id.

At the ensuing bench trial, the trial judge used the “reasonable expectations” test – which had been used by the Court of Special Appeals in Edenbaum v. Schwarcz-Osztreicherne, 165 Md. App. 233 (2005) – to determine whether David had been oppressed as a minority shareholder. Using that test, the trial court found:

[David’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. [David] was more than a mere employee of Quotient—he was, in all respects, a founding member of the company and made significant contributions to the company’s later success.

Id. at 357.

The trial court then found that Clark had “oppressed [David] by firing him for refusing to sell his shares.” Id. at 358. The court did not find that Jodi had oppressed David. But the court also found that David’s conduct did not warrant dissolving the company pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413. That statute lists the grounds for an involuntary dissolution of a corporation. Among those grounds are that “[t]he acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent.” Section 3-413 (a)(2). Instead of ordering dissolution, however, the court thought that “a more appropriate remedy for [Clark’s] oppressive conduct was to order an accounting of the Lares’ personal use of Quotient funds unrelated to Quotient’s business purposes.” Id.

After the trial court resolved the other issues and claims in the case, the parties noted cross-appeals. Relying heavily on its decision in Edenbaum, which had embraced the “reasonable expectations” test, the Court of Special Appeals largely affirmed the trial court’s rulings. The Court of Appeals granted David’s petition for a writ of certiorari.

In a 5-2 opinion authored by Judge McDonald, the Court agreed with the approach adopted by Court of Special Appeals, holding “that the ‘reasonable expectations’ doctrine is the test for oppressive conduct.” Id. at 370. Under that doctrine, a court gauges the majority shareholder’s alleged misconduct “against the ‘reasonable expectations’ of the minority shareholder when the minority shareholder obtained his or her interest in the company.” Id. at 365. But those expectations must be reasonable; “the concept of oppression is not measured solely by the subjective expectations or desires of the minority shareholder.” Id. The minority shareholder’s expectations must be “both reasonable under the circumstances” and “central to the [minority shareholder]’s decision to join the venture.” Id. (internal quotation marks omitted) (citations omitted).

If a court determines that a majority shareholder has thwarted a minority shareholder’s reasonable expectations, what relief is available to that oppressed minority shareholder? The Court of Appeals noted that, while Section 3-413 mentions only dissolution as a remedy for oppressive conduct, that “statute also refers to the court acting as a ‘court of equity,’ which indicates that the Legislature intended for a court to exercise its equitable powers in such a case.” Id. at 368 (footnote omitted). The Court again cited to the decision of the Court of Special Appeals in Edenbaum, where that latter court “observed that dissolution is an extreme remedy and should be avoided if less drastic equitable remedies are available,” and it “listed a non-exhaustive set of alternatives to dissolution that might be appropriate in a particular case.” Id. (citation omitted).

Thus, the Court of Appeals held “that dissolution is not the only remedy if oppression is found.” Id. at 370. Furthermore, when fashioning a remedy short of dissolution, a court “is not required to match its remedy to an expectation of the minority shareholder,” and “a court should take into account not only the reasonable expectations of the oppressed minority shareholder, but also the expectations and interests of others associated with the company,” e.g. other shareholders, corporate management, employees, and customers. Id. at 369, 370.

The Court concluded that the circuit court had fashioned a proper remedy for David. The Court agreed with the lower court that “employment-based relief” was not appropriate. David did not have a contract that negated the “presumption in Maryland law that an employment relationship is ‘at-will’ – i.e., terminable by either party at any time, with our without cause.” Id. at 363-64. Although the trial court found that David “had a reasonable expectation of future employment at the time he became a shareholder,” that finding was just “an assessment of his expectations for purposes of the dissolution remedy,” and did not entitle him to “an employment-related remedy for a non-existent employment contract.” Id. at 371.

The Court explained that “[a] reasonable expectation for purposes of the corporate dissolution statute is simply a way of detecting oppression, but it does not dictate the relief that an equity court is to grant.” Id. In short, the Court held that the trial court had fully considered the evidence and had properly exercised its discretion in shaping a remedy:

The Circuit Court in this case appropriately considered the fact that Quotient was a thriving business, growing in the number of employees and contracts and that its majority shareholder—Jodi Lare—had not oppressed Mr. Bontempo, in deciding that dissolution was an inappropriate remedy for Mr. Lare’s oppression. In fashioning a lesser remedy, the court acted well within its discretion when it decided not to require employment-related relief without an oral or written agreement to support that relief. To hold that the court abused its discretion and that Mr. Bontempo was entitled to employment-related relief—whether reinstatement or the monetary damages he is primarily interested in—would be to convert a discretionary equitable remedy into a substantive legal right.

Judge Adkins wrote a dissenting opinion, which was joined by Judge Harrell. The dissenting judges agreed that the reasonable expectations doctrine provides the appropriate test for determining whether a majority shareholder has oppressed a minority shareholder, but they thought the trial judge had improperly applied that test. Judges Adkins and Adkins thought that the trial judge should have considered employment-based remedies.

In short, the law in Maryland is clear. Courts are empowered to protect the reasonable expectations held by a minority shareholder when he or she obtains an interest in a corporation. Those expectations, however, must be objectively reasonable and they must be central to the shareholder’s decision to join the venture. If a minority shareholder demonstrates that a controlling shareholder has frustrated those expectations, a Maryland court can fashion equitable relief that is appropriate under all relevant circumstances, taking into account the reasonable expectations of that minority shareholder, as well as the expectations and interests of others associated with the company, including other shareholders, corporate management, employees, and customers.

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