It’s Time to Address Sex Discrimination Against Women Owners of Closely Held Companies, Say These Two Law Professors
April 18, 2022
Longtime readers of this blog may recall a post I wrote three years ago titled Minority Shareholder Oppression in the #MeToo Era. The post highlighted an apparent first-of-its-kind decision in a judicial dissolution case brought by certified public accountant Diane Straka, a minority shareholder of an accounting firm. The court upheld her claim of oppression by the male, majority shareholders based on their toleration of demeaning behavior directed at Ms. Straka by a senior employee at the firm and other discriminatory conduct concerning her profit-sharing and management role. Central to the court’s decision in Straka was its finding that the majority shareholders “and indeed, any shareholder of any corporation, should know that a female shareholder reasonably expects to be treated with equal dignity and respect as male shareholders forming the majority.”
No one should be under the illusion that the fact pattern presented in Straka presents a singular anomaly in the world of closely held companies. Nor should anyone underestimate the complexity of the reasons why female business owners who suffer discrimination in its various forms at the hands of their partners don’t come forward, much less sue their partners. Nor should anyone think there are easy legal solutions under existing common and positive law that would resolve the tension between society’s interests in protecting individuals from discriminatory behavior violating our fundamental cultural and legal norms, and promoting the freedom of business owners to order their business affairs and partner relations as they know best to maximize productivity and economic growth.
Which is why it’s important to bring to interested readers’ attention two recent, thought-provoking articles authored by two law professors with legions more knowledge and insight concerning these issues than I possess. Last year, the Indiana Law Review published an article by Professor Meredith Miller of the Touro Law Center entitled Challenging Gender Discrimination in Closely Held Firms: The Hope and Hazard of Corporate Oppression Doctrine, available on SSRN here. More recently, the Houston Law Review published an article by Professor Ann Lipton of the Tulane University Law School entitled Capital Discrimination, available on SSRN here.
Professor Miller’s article has a somewhat narrower focus on shareholder oppression doctrine and case law as compared to Professor Lipton’s broader treatment of the issues. The two articles nonetheless share a number of common elements and themes. They both discuss at length the Straka case. They both stress the severe limitations of Title VII employment anti-discrimination laws as a tool for combatting partner-on-partner discriminatory behavior, as exemplified by rarely successful Title VII suits brought by women partners in a variety of mostly large, professional service organizations with centralized management. They both acknowledge that expanding or creating private rights of action for victims of such behavior, at best, is an imperfect remedy.
At they same time, they both emphasize that, just as highly publicized lawsuits by women against titans in the corporate and entertainment world have altered behavior in the C-suite and led to greater diversity in the board rooms of public companies, the judiciary’s use of its existing tool kit of common-law doctrine, burdens of proof, and equitable remedies with respect to the litigation of shareholder/manager fiduciary duties in cases of alleged gender-based discrimination (e.g., an explicit recognition that the fiduciary duties of loyalty and care require a lack of bias, writes Professor Lipton) in the long term also may raise consciousness with a salutary impact on corporate culture and behavior within private companies.
In coming weeks, I’ll air a new episode of my Business Divorce Roundtable podcast featuring a recently recorded interview of Professor Miller about her article which I’ll also publicize on this blog. In the meantime, I leave you with the following abstracts from the Professors Miller’s and Lipton’s articles with a strong recommendation that you read them both.
The #MeToo Movement has ushered sexual harassment out of the shadows and thrown a spotlight on the gender pay gap in the workplace. Harassment and unfair treatment have, however, been difficult to extinguish. This has been true for all workers, including partners – those women who are owners in their firms and claim that they have suffered harassment or unfair treatment based on gender. That is because a partner’s lawsuit for discrimination often will suffer an insurmountable hurdle: plaintiff’s status as a partner in the firm means that they may not be considered an “employee” under the relevant employment discrimination statutes. This article discusses an underexplored and underutilized potential alternative in seeking a remedy for discrimination: oppression (or “freeze out”) doctrine in the closely held business. The article begins with a discussion of the current jurisprudence addressing when an owner is an employee for purposes of employment discrimination statutes. It also explores the doctrine of minority shareholder oppression, both as an instrument of enforcing fiduciary obligations and as a statutory mechanism to petition for dissolution or seek other equitable relief. The article then brings these subjects together by discussing how a female owner’s claim of discrimination or harassment fits into existing minority oppression doctrine, and by comparing the substantive requirements of discrimination claims and corporate oppression claims. Ultimately, this article concludes that one of the advantages of oppression doctrine is that it need not be framed in gender-based terms to succeed. Indeed, in discrimination cases it is often very difficult to prove that the employment decisions were “based upon sex,” and oppression doctrine bypasses this requirement. However, this advantage in any individual case may also prove to be a greater overall disadvantage because, without framing the claim in gender-based terms, the broader goals of workplace equality are not advanced.
The law of business associations does not recognize gender. The rights and responsibilities imposed by states on business owners, directors, and officers do not vary based on whether the actors are male or female, and there is no explicit recognition of the influence of gender in the doctrine. Sex and gender nonetheless may pervade business disputes. One co-owner may harass another co-owner; women equity holders may be forced out of the company; men may refuse to pay dividends to women shareholders. In some contexts, courts do account for these dynamics, such as when married co-owners file for divorce. But business law itself has no vocabulary to engage the influence of sex and gender, or to correct for unfairness traceable to discrimination. Instead, these types of disputes are resolved using the generic language of fiduciary duty and business judgment, with the issue of discrimination left, at best, as subtext. The failure of business law doctrine to confront how gender influences decision-making has broad implications for everything from the allocation of capital throughout the financing ecosystem to the lessons that young lawyers are taught regarding how to counsel their clients. This Article will explore how courts address – or fail to address – the problem of discrimination against women as owners and investors. Ultimately, the Article proposes new mechanisms, both via statute and through a reconceptualization of fiduciary duty, that would allow courts to recognize, and account for, gender-based oppression in business.