3.4.3.4.2 Case development

In the case of In re Topper, the New York court introduced the notion of reasonable expectations. Topper, the appellant, sought judicial relief in a petition for dissolution of the pharmacy business or a buyout. Topper gave up his previous job which he had already held for 25 years, and moved his family from Florida all the way up to New York, and put his life savings into the new business as a minority shareholder. His dedication and hard work was rewarded by a rise in salary from $30,000 to $75,000 in his first year in the new business. He was later fired, however, and removed from office. Topper filed a petition for oppression by the majority, while the respondents contended that Topper had been discharged with justification and the discharge was not subject to any statutory sanction. The respondents did not give the details of the justification; instead, both of them admitted that Topper was the most active member among the three shareholders, and though the expectation of a position in the management had not been expressed in any written agreement, it did form a necessary component of the corporation's formation. Given the fact that Topper had discharged his duties with full competence and to everyone's satisfaction, no misconduct was alleged or found, the court maintained in this cast that "whether controlling shareholders discharged the third shareholder for cause or in their good business judgement was irrelevant."2 By affirming the respondent's oppressive conduct, the New York court reasoned that "the respondents' actions...severely damaged Topper 's reasonable expectations, which constitute the bargain of the parties in light of which subsequent conduct must be appraised."3 The court in this case, by adopting the standard of reasonable expectation, not only overturned the business judgement rule, but also did not adopt the standard applied in the breach of fiduciary duties by which the majority were allowed to defend themselves by a business purpose, as in the Wikes case.4 In this way, the court showed that the focus had shifted from the identification of inequitable behaviour on the part of the majority to the basis on which the minority had bargained before they joined the corporation.5

The Matter of Kemp & Beatley, Inc is considered to be a landmark decision by the New York court because it contains detailed reasoning and a clear interpretation of the frustration of reasonable expectations and also delineates the limitations on the application of this standard. Courts in several states have adopted this interpretation as the best guide to define oppression.7

Dissin and Gardstein together owned 20.33 per cent of Kemp & Beatley's stock. Dissin had worked for 42 years for the corporation before his resignation, and Gardstein 35 years before his employment was terminated. When they were in office, the company's eamings were distributed in proportion to share-holding. After they left the company, however, they received no distributions either in the form of dividends or in the form of extra compensation. The company still awarded extra compensation, but stock ownership was no longer the basis for the payments but the services rendered to the corporation. This change in the distribution policy "amounted to nothing less than an attempt to exclude petitioners (Dissin and Gardstein) from gaining any return on their investment through the mere re-characterization of distributions of corporation income."8 In other words, the net result is that the petitioners got no return on their investment and they could not exit the corporation. Their investments became worthless while the respondent received increased executive compensation.

The petitioners thus invoked the involuntary dissolution statute (business corporation law s. 1104-a NY) alleging oppressive actions by the controlling shareholders. The referee concluded: "those in control of the corporation have acted in such a manner as to defeat those expectations of the minority stockholders which formed the basis of their participation in the venture."9

The NY court admitted that, compared to illegal and fraudulent conduct, it was not very familiar with the concept of "oppressive conduct". In this case, it attempted to be guided by 3 aspects: the characteristics of a close corporation, purpose of this dissolution legislation, and reasons of the minority to invest in such corporations.

The characteristics of close corporations were explained in the previous part.10 This dissolution legislation, according to the court, has a remedial purpose and aims at protecting minority shareholders.11 As to the reasons, the court found that a shareholder who was an owner of the corporation would reasonably expect "a job, a share of corporate earnings, a place in corporate management, or some other form of security",12 and "he would be oppressed in a very real sense when others in the corporation seek to defeat those expectations..."13

Finally, the court concluded that:

In this case, the court achieved three purposes: first, it clarified that oppressive conduct was distinct from illegality or fraud conduct; secondly, it confirmed the appropriateness of utilizing "reasonable expectations" as a means of interpreting oppressive conduct, and once again, did not give any room for consideration of the business judgement rule or business purpose. Thirdly, it set several limitations on the application of `reasonable expectations'. The issue of limitation of application will be explained in section 3.4.3.4.3.

The court had recognized its discretion to liquidate the corporation once the oppressive conduct was found. However, it further stated that:

The relief granted in this case was thus a court-ordered dissolution conditioned upon the corporation's election to purchase the petitioner's stock, i.e., a buyout.16