Balvik v. Sylvester

• Decision Date: 20 August 1987
• Docket Number: No. 11373,11373
• Citation: 411 N.W.2d 383
• Parties: Elmer BALVIK, Plaintiff and Appellee, v. Thomas SYLVESTER and Weldon Corporation, Defendants and Appellants. Civ.
• Court: North Dakota Supreme Court

Page 383

411 N.W.2d 383

56 USLW 2161

Elmer BALVIK, Plaintiff and Appellee, v. Thomas SYLVESTER and Weldon Corporation, Defendants and Appellants.

Civ. No. 11373.

Supreme Court of North Dakota.

Aug. 20, 1987.

James R. Jungroth, of Mackenzie, Jungroth, Mackenzie & Reisnour, Jamestown, for plaintiff and appellee.

James A. Wright, of Hjellum, Weiss, Nerison, Jukkala, Wright & Paulson, Jamestown, for defendants and appellants.

VANDE WALLE, Justice.

This is an appeal from a district court judgment dissolving Weldon Corporation [Weldon] and appointing a liquidating receiver to dispose of its assets. We affirm in part, reverse in part, and remand with directions.

In November 1979 Elmer Balvik and Thomas Sylvester formed a partnership, Weldon Electric, for the purpose of engaging in the electrical contracting business. Balvik contributed $8,000 and a vehicle worth $2,000, and Sylvester contributed $25,000 to the partnership's assets. Although Sylvester's contribution under the terms of the articles of partnership was 70 percent, and Balvik's was 30 percent, both partners had an equal vote and equal rights in the management of the business.

The parties continued operating the business as a partnership until 1984, when, at Sylvester's urging, they decided to incorporate. Stock was issued to Balvik and Sylvester in proportion to their partnership ownership interests, with Sylvester receiving 70 percent and Balvik receiving 30 percent of the stock. Sylvester and his wife and Balvik and his wife were the four directors of the corporation, with Sylvester being elected president and Balvik being elected vice-president. The bylaws of the corporation provided that a shareholder was entitled to one vote for each share of stock owned; thus Balvik held only a minority voice in the management of the corporation. The bylaws also provided that the "sale of shares of stock by any shareholder shall be as [set] forth in a 'Buy-Sell Agreement' entered into by the shareholders." Although the subject of the "buy-sell agreement" was discussed on various occasions by the parties and an attorney had prepared a "stock redemption agreement" for their consideration, no separate agreements were executed by the parties.

In 1985 problems arose between the parties concerning their differences in philosophy of management of the corporation. Sylvester wanted excess profits reinvested into the corporation while Balvik wanted them withdrawn and paid out as bonuses or dividends. Sylvester also questioned Balvik's job performance. According to Balvik, during August 1985 he was fired as an employee of the corporation. According to Sylvester, Balvik was removed from his position as the foreman on a job the corporation was performing for the Ladish Malting Company in Spiritwood, but was not "fired" from his position with the corporation. In any event, Balvik no longer came to work for the corporation and began drawing unemployment benefits. He subsequently obtained employment at the Ladish Malting Company.

In October 1985, Balvik brought this action seeking Weldon's dissolution or, in the alternative, that he be paid the "true value" of his stock. He also sought punitive damages. Balvik alleged that Sylvester had breached a fiduciary duty he owed to Balvik and that Sylvester had been guilty of oppression and malice by discharging him from employment with the corporation. Balvik also alleged other instances of misconduct by Sylvester and asserted that he had "reasonable expectations ... that he would be treated as a partner, furnished employment and not discharged merely because he did not hold an equal amount of stock."

In January 1986 Weldon held its annual shareholders meeting. On the strength of Sylvester's 70 percent of the voting shares, the bylaws were amended to reduce the number of directors from four to three, and to reduce the number needed for a quorum from three to two. Sylvester, his wife, and Peter Sylvester were voted in as the new directors of the corporation. The directors then voted in Peter Sylvester as the new vice-president, removing Balvik from that office. It does not appear from the record that Weldon has declared a dividend or that Balvik has received any money from the corporation since August 1985.

The trial court ruled in favor of Balvik, finding that Sylvester had discharged Balvik from his employment with the corporation ¹ and had discharged Balvik and his wife as members of the board of directors, leaving Balvik without any benefit from his 30-percent ownership in the corporation. The court concluded that Sylvester, through a series of acts culminating with the January 1986 shareholders meeting, effectively prevented Balvik "from participating in the management or operation of Weldon Corporation, thus constituting 'oppressive' behavior under Sec. 10-21-16, N.D.C.C., and establishing sufficient grounds for the dissolution of Weldon Corporation." This appeal followed.

The issue on appeal is whether Sylvester's actions amounted to "oppressive" conduct under Sec. 10-21-16(1)(b), N.D.C.C., ² sufficient to justify the forced dissolution of Weldon. That section provides in pertinent part:

"10-21-16. Jurisdiction of court to liquidate assets and business of corporation.-- The district courts of the state of North Dakota shall have full power to liquidate the assets and business of a corporation:

"1. In an action by a shareholder when any of the following is established:

* * *

* * *

"b. That the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent."

"Oppressive" conduct is not defined in the statute or in the Model Business Corporation Act, from which our statute was derived. See Model Business Corporation Act Annotated Sec. 97, at p. 554 (2d ed. 1971); see also, Robertson's Inc. v. Renden, 189 N.W.2d 639 (N.D.1971). Courts construing the Model Act have noted that there are no specific elements necessary for a finding of oppression, but that it is an expansive term that is used to cover a multitude of situations dealing with improper conduct which is neither "illegal" nor "fraudulent." E.g., McCauley v. Tom McCauley & Son, Inc., 104 N.M. 523, 724 P.2d 232 (Ct.App.1986), and cases cited therein. As the court stated in White v. Perkins, 213 Va. 129, 189 S.E.2d 315, 319 (1972):

"The word 'oppressive,' as used in the statute does not carry an essential inference of imminent disaster; it can contemplate a continuing course of conduct. The word does not necessarily savor of fraud, and the absence of 'mismanagement, or misapplication of assets,' does not prevent a finding that the conduct of the dominant directors or officers has been oppressive. It is not synonymous with 'illegal' and 'fraudulent.' "

The statutory concept of oppressive conduct, and the broad and imprecise definitions of the term given by the courts, is best understood by examining the nature and characteristics of close corporations. The typical attributes of a close corporation are that: (1) the shareholders are few in number, often only two or three; (2) the shareholders usually live in the same geographical area, know each other, and are well acquainted with each other's business skills; (3) all or most of the shareholders are active in the business, usually serving as directors or officers or as key participants in some managerial capacity; and (4) there is no established market for the corporate stock. 1 F. O'Neal and R. Thompson, O'Neal's Close Corporations Sec. 1.07 (3d ed. 1987); see also, D. MacDonald, Corporate Behavior and the Minority Shareholder: Contrasting Interpretations of Section 10-19.1-115 of the North Dakota Century Code, 62 N.D.L.Rev. 155 (1986); Sorlie v. Ness, 323 N.W.2d 841, 845 n. 2 (N.D.1982). Thus it is generally understood that, in addition to supplying capital and labor to a contemplated enterprise and expecting a fair return, parties comprising the ownership of a close corporation expect to be actively involved in its management and operation. See Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173 (1984). One leading commentator observed:

"Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and does not desire to assume the responsibilities of management, the shareholder in a close corporation considers himself or herself as a coowner of the business and wants the privileges and powers that go with ownership. Employment by the corporation is often the shareholder's principal or sole source of income. As a matter of fact, providing for employment may have been the principal reason why the shareholder participated in organizing the corporation. Even if shareholders in a close corporation anticipate an ultimate profit from the sale of shares, they usually expect (or perhaps should expect) to receive any immediate return in the form of salaries as officers or employees of the corporation rather than in the form of dividends on their stock. Earnings of a close corporation, often are distributed in major part in salaries, bonuses and retirement benefits, a fact which illustrates how some business policies in a close corporation are more likely than in a publicly held corporation to be determined by tax consequences." 1 F. O'Neal and R. Thompson, supra, at p. 25. [Footnotes omitted.]

The limited market for stock in a close corporation and the natural reluctance of potential investors to purchase a noncontrolling interest in a close corporation that has been marked by dissension can result in a minority shareholder's interest being held "hostage" by the controlling interest, and can lead to situations where the majority "freeze out" minority shareholders by the use of oppressive tactics. See McCauley, supra; 2 F. O'Neal, Close Corporations Sec. 9.02 (2d ed. 1971).

"Freeze-outs are actions taken by the controlling shareholders to deprive a minority shareholder of her interest in the business or...