Iowa Supreme Court Defines “Oppression:” Lessons for Closely Held Corporations—Including Auto Dealers

Under Iowa law, a court can order the dissolution of a corporation if the minority shareholder can prove oppression. If the company dissolves, the minority shareholder will receive their appropriate share of the company’s assets. In addition, the Iowa Business Corporation Act (“IBCA”) provides a similar statutory remedy for oppression, but also allows the majority shareholders to purchase shares instead of dissolving the company in its entirety. However, Iowa law did not define “oppression” until Baur v. Baur Farms, which was decided on June 14.

The Court held, “majority shareholders act oppressively when, having the corporate financial resources to do so, they fail to satisfy the reasonable expectations of a minority shareholder by paying no return on shareholder equity while declining the minority shareholder’s repeated offers to sell shares for fair value.” In this holding, the Iowa Supreme Court provided an expansive definition of oppression based on reasonable expectations. The Court will determine whether a minority shareholder is being oppressed by considering the minority shareholder’s “reasonable expectations” regarding return on their investment. Additionally, the Court will also consider all of the circumstances of the business before determining whether there is oppression.

In Baur, the minority shareholder could sell his shares to a third party, but he first had to offer his shares to the other shareholders, and they could purchase the shares at fair value. This provision is somewhat common in closely-held corporations, including some auto dealership corporations. However, the majority shareholder refused to buy the shares at reasonable value and refused to pay any dividends to the minority shareholder. As a typical minority shareholder, he had little market outside of the corporation.

The bylaws in Baur provided a method for calculating the “fair value” of the shares, but the company failed to update those numbers since 1984. Since the value of the corporation’s assets skyrocketed, if the minority shareholder sold his shares at the 1984 price, then he would be selling them at a significantly reduced value. Importantly, the Court made it clear that if the “fair value” had been computed properly, then the written agreement would have been upheld. Therefore, if the written contract is reasonable, then it will be upheld.

Baur provides two major lessons to closely held corporations, including auto dealership corporations. First, majority shareholders should take an objective look at how they are interacting with their minority shareholders. A majority shareholder’s actions should be within the Baur standards. If you are concerned that your actions might fall into the Court’s definition of oppression, then you should speak to an experienced business and auto dealer attorney.

This case also illustrates that the bylaws of closely held corporations may need to include provisions that realistically address adjustments to corporate control and shareholder buyouts. The Baur family would have saved time and money with a well-developed set of bylaws. Since the Court will generally uphold written agreements, you should have an attorney examine your corporation’s bylaws if you are concerned about future corporate governance. Contact experienced auto dealer counsel to discuss what this case means to your closely held corporation.