3.4.3.4.3 Limitations on the scope of application of reasonable expectations

Eisenberg, who helped draft certain revisions to section 751 (a dissolution provision) in the Minnesota Business Corporation Act, states that: "this section is remedial in nature and should be liberally construed as an addition to the rights afforded to non-controlling shareholders by law and the corporation's governing documents."1 Though the involuntary dissolution statute purports to protect minority shareholders, if the scope of reasonable expectations is not clearly defined or is defined too broadly, this remedy may be manipulated by the minority as a `coercive tool'. The following paragraphs list several limitations summarized from case reviews.

The NY court in the Kemp case already held that the minority's expectations must be "objectively viewed"; "reasonable onder the circumstances"; "central to the petitioner's decision to join the venture", and mere disappointment about the unsatisfactory running of a corporation cannot be equated with oppressive conduct by the majority.2

In Meiselman v. Meiselman (1983),3 the North Carolina court held that to ascertain the reasonable expectations among the parties, the court should examine "the entire history of the participants' relationship".

Interests and expectations of the parties at the beginring of the business constitute the foundation of bargaining and the basis on which subsequent conduct and expectations can be assessed. Expectations of parties may alter in the course of business development, and courts should take this factor into consideration as well.

The Meiselman court also noted that the key element in determining which expectations were reasonable was to see whether such expectations were mutually known and understood by all the parties. In a close corporation, mutual understandings or results of bargaining are often not written down in the corporate charter, bylaw, or in other agreements.4 Therefore, expectations have to be deduced not only from written documents but also from the parties' actions.5 "Privately held expectations which are not made known to the other participants are not `reasonable'. Only expectations embodied in understandings, express or implied, among the participants should be recognized by the court."6

As a rule, an employee can be dismissed according to the terras of a service contract. A director, even if he is a minority shareholder at the same time, cannot claim the breach of fiduciary duties by the controlling shareholders if he is discharged pursuant to his service contract. However, the result is different in a close corporation where as we have said before, the expectation to engage in the business management may form the very foundation that a minority shareholder decides to join the corporation. Accordingly, the Supreme Court of Massachusetts acknowledged that the termination of a minority shareholder's employment contract was likely to be a situation where the majority shareholder had breached its fiduciary duty to the minority.7

The Merola v. Exergen Corp. Case adds a new analysis to the construction of reasonable expectations. 8 It maintains that "not every discharge of an at-will employee of a close corporation who happen to own stock in the corporation gives rise to a successful breach of fiduciary duty claim",9 so long as such termination is in accordance with employment contract terms.10 Treatment therefore differentiates between minority shareholders and at-will employees who happen to have some stocks, for instance, through stock options.

But then, what if the minority is a real nuisance and acts vexatiously? In this instance, reasonable expectations should be applied vice versa. What the minority shareholders have done should also be in conformity with the majority's minimum expectations, like fidelity, basic competence, honesty and so on. So the minority shareholders "whose own acts, made in bad faith and undertaken with a view toward forcing involuntary dissolution, give rise to the complained act of reasonable expectation", do not deserve to be protected by law. 11 The majority shall have the power to drive such minorities out of the business; otherwise an ill-minded minority can never be expelled. Nevertheless, sheer incompetence which is not fatal to the business operation is not a sufficient excuse to expel a minority. In brief, the minority can enjoy statutory protection as long as the basic expectations from the majority are fulfilled. Therefore, we can say that this reasonable expectations test, in essence, also relates to the idea of fairness.12 When the majority is deprived of the shelter of the business judgement rule, the minority is not allowed to enjoy unlimited protection either. A court still has to ask itself whether it is fair to grant protection to such a minority shareholder and what a similarly situated shareholder would think was fair.13