Minority Shareholder Oppression in the #MeToo Era
January 28, 2019
In the last two years, fueled by a series of high profile cases involving media executives, entertainers, and other public figures, #MeToo has gained worldwide recognition as a symbol of the burgeoning movement against sexual harassment and assault, especially in the workplace.
In our country, we have federal, state, and local statutes designed to protect employees against gender discrimination including sexual harassment and hostile workplace environment. Such laws generally do not extend protection to owners of closely held business entities against conduct of the sort by their co-owners.
Perhaps it was inevitable that the heightened consciousness of the #MeToo movement, and the willingness of female complainants to come forward, should find its way into the arena of minority shareholder oppression, leading to a ruling earlier this month in Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op 29017 [Sup Ct Erie County Jan. 9, 2019], in which, following an evidentiary hearing, the court upheld oppression allegations by a female minority shareholder of an accounting firm based in large part on her male co-owners’ toleration of offensive, demeaning, and condescending comments made primarily by a senior accountant-employee at the firm.
The case involves an accounting firm located on the outskirts of Buffalo, New York, organized as a professional corporation which combined the personnel and practices of two separate accounting firms. Petitioner Diane Straka, an experienced certified public accountant, was one of four 25% shareholders, directors, and officers of the firm. The other three shareholders were male.
Each of the shareholders assumed specific administrative duties; Straka’s was information technology. The shareholders also agreed to a formulaic “earnings matrix” compensation plan that allocated client revenues and expenses. They had no written shareholders agreement.
According to the court’s findings of fact, soon after moving into her new office in early 2015, Straka introduced herself to a non-shareholder, senior accountant at the firm who had been a partner at one of the predecessor firms. Knowing that Straka was a partner at the new firm, the senior accountant said, “Oh, are you the one who makes me coffee?” Later he took her to look at a cartoon he posted on his office door that was demeaning to women.
Straka also received reports about the senior accountant’s “unsolicited, demeaning remarks” to female employees who complained to one or more of the male shareholders, after which Straka and those women did not use the office lunch room in order to avoid his “uncomfortable” presence. The court’s opinion also described an incident in which the senior accountant entered a conference room with Straka and another male partner and asked where he should sit. When Straka told him he could sit anywhere, he replied, “Can I sit on your lap, Diane?” The other male partner in the room responded with a “smirk.”
Other demeaning comments highlighted in Straka’s post-hearing brief included, “When did they make the CPA exam easier for women?” and “In my next life, I want to come back as a woman because they don’t do anything.”
Straka’s post-hearing brief accused her male partners of “treat[ing] the Corporation as a boys’ club, permitting the open and unabashed harassment of Straka by a male employee — with their knowledge and without penalty — and marginalized Straka in every manner they could.” The court found that Straka raised the issue of the senior accountant’s demeaning comments at a partnership meeting, and that one of the male partners spoke with him afterward and asked him “to tone it down” but never made a record or followed up with him or with the partner in charge of human resources. According to Straka’s petition, when she confronted her partners about the senior accountant’s continuing harassment, they told her he’d be retiring soon and that she should just “hang in there.”
Other examples cited in Straka’s testimony of gender-based “marginalization” by her male partners included:
- their initial resistance to including Straka’s name in the firm name, and ultimately listing it last, even though she had the second highest billings among the shareholders;
- naming Straka to the corporate office of Secretary, “the traditionally female role”;
- being “disrespected” by one of the male shareholders in front of staff; and
- not being permitted to use the office of her choice, unlike the male shareholders.
Straka also offered evidence of oppressive conduct by her partners relating to their “unfair” implementation of the earnings matrix which resulted in her receiving the lowest amount of compensation despite her having the second highest billings and revenue, the undermining of her role as the head of IT, and not providing her with adequate staffing.
Straka alleged that by the end of April 2016, she no longer could work “in such a hostile, inflammatory and unprofessional environment” and that she informed her partners that she wanted to withdraw from the firm and redeem her shares for a price to be negotiated. By July 2016, she allegedly was frozen out of the firm’s books and records and was excluded from all personnel decisions.
In a letter to the firm in August 2016, allegedly in reliance on an oral agreement in principle to redeem her shares, Straka submitted her resignation “as a shareholder, director and officer” effective the same date. Soon afterward, with Straka’s consent the remaining shareholders eliminated her name from the firm’s name and, some months later, without Staka’s knowledge or consent, brought in a new accountant as a shareholder and director, thereby diluting Straka’s stock interest.
In their defense, as detailed in their post-hearing brief, the respondent shareholders primarily contended that they responded appropriately to complaints about the senior accountant’s behavior, including holding a professionally guided harassment training session, and that judicial dissolution was outside the reach of a shareholder like Straka who voluntarily resigned from the firm to join a competing accounting firm.
The Court’s Decision
We know instantly we’re in new territory when we read the opening sentence of Erie County Supreme Court Justice Henry J. Nowak’s opinion, in which he framed the issue as whether “disrespectful and unfairly disproportionate treatment of a female shareholder by the male majority in a closely held corporation constitutes oppression pursuant to Business Corporation Law § 1104-a (a) (1).”
In his findings of fact, Justice Nowak credited Straka’s evidence of the senior accountant’s demeaning behavior and of her male partners’ neglect to take appropriate remedial action. He also found that Straka demonstrated that she was undermined in her role as the head of IT; that her male partners unfairly applied the earnings matrix in her case and excluded her from her share of profits; that they diluted her stock ownership from 25% to 20% without her consent; and that in 2018 they sent her a schedule K-1 for 2017 accompanied by correspondence stating that 2017 is “your final year of ownership” in the corporation.
In his conclusions of law, Justice Nowak rejected the respondents’ contention that Straka relinquished her shareholder status when she resigned in 2016, holding that the respondents were estopped from taking a position inconsistent with the firm’s tax filings reporting her as a shareholder in 2017.
Justice Nowak next turned to the central question, quoting from the standard established by the Court of Appeals’ landmark decision in Matter of Kemp & Beatley, whether the respondents’ treatment of Straka
“substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise.”
Then, in the key passage of his opinion, Justice Nowak answered the question thusly:
This court finds that [the respondent 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. Straka has demonstrated that she was not. The shareholders’ slow and inadequate response to [the senior accountant’s] demeaning behavior marginalized Straka, as did the lack of respect provided to her as the head of IT at the corporation.
Justice Nowak further concluded that the respondents frustrated Straka’s “reasonable expectation for fair compensation” by the use of the earnings matrix and allocation of profits as salaries constituting disproportionate de facto dividends, and that the addition of a shareholder in 2017 “constituted oppressive conduct by adversely affecting Straka’s share in the corporation without her knowledge or consent.”
Justice Nowak nonetheless concluded that the respondents’ oppressive conduct did not require dissolution of the firm. Instead, in consideration of “the size and nature of the corporation,” Justice Nowak wrote, “the court finds that a buyout of Straka’s shares would satisfy her expectations and the rights of the remaining shareholders. The court will schedule further proceedings to that end.”
Making Sense of Straka
Straka is the one and only case I know of ever to define minority shareholder oppression in gender-based terms as frustration of a female shareholder’s reasonable expectation “to be treated with equal dignity and respect as male shareholders forming the majority.”
It’s debatable whether the court needed to define it so in reaching its finding of oppression on the facts of the case, or whether a gender-based definition of oppression should be seen as an expansion of existing oppression doctrine.
As Kemp & Beatley pronounced, the test for oppression requires examination of the petitioner’s expectations upon joining the venture, and then asks whether those expectations were objectively reasonable before deciding whether they were frustrated by the actions of the controlling shareholders. Sometimes those expectations are captured explicitly in a shareholders’ agreement, and sometimes they are recognized by courts as being held implicitly, such as an expectation of having an ongoing voice in management of the company and receiving a return on a cash and/or sweat equity investment in the form of employment compensation in a company that declares no dividends.
One can agree with the premise of Justice Nowak’s oppression analysis, that “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,” while also acknowledging there are plenty of oppression cases in which the petitioning minority shareholder, male or female, complains of personally offensive or disrespectful behavior by the controllers, usually in the lead-up to the termination of their employment, or reduction in compensation and benefits, or removal from the board of directors, or other squeeze-out and freeze-out tactics.
One also can agree that gender-based demeaning behavior is qualitatively different — as is race-based, ethnic-based, or religion-based demeaning behavior — and requires its target to overcome strong social and even professional barriers before taking it public. The question future cases may need to answer is whether such behavior intrinsically is probative of oppression based on an assumed reasonable expectation that one should not be subjected to status-based insults to one’s personal dignity by one’s business partners or, alternatively, because it contributes to an environment in which the petitioning minority shareholder constructively is forced by the majority to abandon the venture or renders her continued participation in the venture untenable, thereby frustrating reasonable expectations of a voice in management, a return on investment, etc.