April 7, 2015
By Ben Jumonville, Senior Associate

Introduction

The Louisiana Business Corporation Act (LBCA) ushered in a sweeping revision of the business corporation laws in Louisiana.[1] The LBCA became effective on January 1, 2015, and introduced many significant changes to Louisiana’s corporation laws. The new law may look familiar to attorneys who have practiced outside of the state because the LBCA is based on the Model Business Corporation Act (Model Act), which is the source of corporation law in 30 other states.[2]

Of the various changes made by the LBCA, one of the most notable is the increased protection of minority shareholders in closely held corporations. Minority shareholders need special protection because their ability to see a return on investment lies almost exclusively in the hands of the majority stakeholders. In a typical corporation where governing authority lies with an elected board of directors, a majority shareholder can take full control of the organization by electing himself and those loyal to him to the board of directors. With control of the board, a majority shareholder then has the power to remove any remaining minority shareholders from the board, refuse to pay them dividends, terminate their employment with the organization, and take other actions that deny them participation or financial rights. In a closely held corporation, these actions are particularly harmful to minority shareholders because their investment is “effectively trapped.”[3] Unlike the stock of publicly traded firms, the stock of a closely held corporation cannot be readily sold in a market.[4]

In an effort to increase fairness, the LBCA implements a number of rules that are designed to alleviate the plight of the minority shareholder. In particular, the most noteworthy protections under the new law are: (1) a remedy for shareholders who have been oppressed by their corporation; (2) shareholder-friendly revisions to the procedures for asserting appraisal rights; and (3) the introduction of “unanimous governance agreements” which allow shareholders to contract around the traditional corporate structure.

I. The Oppression Remedy

Perhaps the most striking feature of the LBCA is the introduction of the remedy for shareholder oppression.

Under the LBCA, shareholders can now force the corporation to buy out all of their shares at “fair value” if they can prove that the corporation has engaged in oppression.[5] No such remedy existed under the old law.

The LBCA defines oppression as those corporate practices, which “considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.”[6] Both the conduct of the petitioning shareholder and the “reasonable expectations” of all shareholders in the corporation are relevant factors in determining whether the corporation acted in fairness and good faith.[7] This statutory definition is unique to Louisiana, as the Model Act does not provide a definition of oppressive conduct.[8]

The shareholders ability to demand a buyout under the LBCA is a major deviation from prior Louisiana law as well as the Model Act. Under the Model Act, a shareholder bringing an action for oppressive treatment can only petition for the dissolution of the company.[9] Then, after the dissolution proceeding has been initiated, the corporation or other shareholders may elect to purchase the shares of the petitioning shareholder if they wish to avoid the dissolution proceeding.[10]

The LBCA, on the other hand, provides that petitioning for a buyout of their shares is the shareholder’s exclusive option.[11] The corporation can then elect to convert the buyout proceeding into a proceeding for a “court-supervised dissolution of the corporation.”[12] The comments to the LBCA explain that these changes were made in order to allow the corporation to contest the shareholder’s allegations of oppression without risking an involuntary dissolution of the entire company and to align the LBCA’s oppression remedy with those remedies that have been provided in the modern jurisprudence.[13]

Equally important as the shareholders’ new right to a buyout is the fact that the LBCA oppression remedy precludes the practice of discounting the value of shares for lack of marketability or minority status.[14] Although courts in many jurisdictions have rejected the idea of discounting, the jurisprudence in Louisiana had previously suggested that discounting should be applied.[15] Nevertheless, the LBCA explicitly rejects the use of discounting, clearing the air of any question as to its application under the new law.[16]

Although the LBCA will likely be seen as a big win for minority shareholders, it has nevertheless been criticized on narrow grounds. One such criticism is the exclusive nature of the buyout remedy.[17] As one commentator pointed out, courts in several other jurisdictions have exercised their “remedial flexibility” by imposing remedies other than a buyout or dissolution.[18] These decisions suggest that alternative remedies are more appropriate in certain scenarios of oppressive conduct.[19]

Additionally, the offending corporation may not have sufficient financial resources to purchase all of the oppressed shareholder’s interest.[20] In such cases, the LBCA requires that the court order the corporation to furnish the shareholder with an unsecured promissory note within 30 days of the date of the judgment that is due in 10 years.[21] But this provision gives the court significantly less discretion than its counterpart in the Model Act, where a court is empowered to “enter an order directing the purchase upon such terms and conditions as the court deems appropriate.”[22] For instance, a court operating under the Model Act rules would be able to order that the purchase price be paid in installments or extend the amount of time to complete the buyout, whereas the LBCA appears to restrict this sort of flexibility.[23]

Finally, the LBCA has been criticized for allowing shareholders to waive their right to the oppression remedy.[24] Because minority shareholders in closely held corporations are often not sophisticated investors, “a waiver of the right to withdraw . . . may simply reflect a minority shareholder’s overtrust, unsophistication, and desire not to ‘rock the boat,’ rather than an informed weighing of the pros and cons of relinquishing a legal right.”[25]

II. Appraisal Rights

The LBCA provisions concerning appraisal rights also favor minority shareholders.[26] Appraisal rights—or “dissenters’ rights” as they were called under the old law[27]—allow a shareholder to force the corporation to buy out all of their shares if the shareholder objects to certain transactions entered into by the corporation.[28] Although these rights existed under the old law, they are now much more accessible under the LBCA.

Rights of dissenters were of limited value to minority shareholders under the old law due to the fact that it was extremely difficult to satisfy the procedural requirements. The old law gave dissenting shareholders only 20 days from the date that they were mailed an unexplained copy of the certificate of merger to demand that the corporation pay them a stated fair value for their shares.[29] During this time period, the shareholder was also required to find a bank (located in the same parish as that of the corporation’s registered office) to act as an escrow agent for their shares and obtain from the bank a letter acknowledging its status as escrow agent. The shareholder would then need to deliver the escrow acknowledgement letter and the demand for fair value to the corporation.[30] If the shareholder satisfied all of these procedural requirements, the corporation could then simply reject the shareholder’s demand for fair value of his shares.[31] This placed the burden back on the shareholder, who then had 60 days from the corporation’s rejection of the demand to file a valuation suit.[32] Even assuming that the shareholder was able to comply with all of these requirements, the shares could still potentially be subjected to discounting due to minority status at the valuation proceeding. [33]

The LBCA completely overhauls the procedures for asserting appraisal rights. Of importance to minority shareholders, the new law moves many of the procedural burdens from the shareholder to the corporation.

The new procedure can be summarized as follows: First, after approving any transaction where appraisal rights may be available, a corporation must send its shareholders a statutory form of notice that provides instructions on how to preserve their appraisal rights.[34] Then, the corporation—not the shareholder—must make arrangements with a bank to serve as an escrow agent for the affected shares.[35] The corporation is required to send the shareholder instructions on how to deposit their shares with the bank, as well as certain financial information to aid in calculating the value of his shares. Additionally, the corporation must provide the shareholder with a simple form for demanding a fair value price for his shares that is to be filled out and returned to the corporation.[36] Upon receipt of the form, the corporation has 30 days to pay the shareholder what the corporation believes is the fair value of the affected shares.[37] If the shareholder is dissatisfied with the corporation’s valuation, then the shareholder must notify the corporation within 30 days of receipt of the payment. The burden is then on the corporation to initiate a valuation proceeding.[38] Finally, the LBCA expressly prohibits the discounting of shares for minority status or lack of marketability.[39]

Similar to the remedy for oppression, the LBCA makes appraisal rights the exclusive remedy for shareholders in situations where appraisal rights are triggered.[40] However, this rule of exclusivity does not overly burden shareholders because the rule only applies if shareholders are allowed to assert appraisal rights without notifying the corporation in advance of their intent to do so.[41]

III. Unanimous Governance Agreements

Prior to the enactment of the LBCA, Louisiana was known as a “particularly hostile jurisdiction” to shareholder agreements.[42] Shareholder agreements were routinely struck down as violations of public policy because the courts deemed that those agreements, which somehow limited the discretion of directors, would hinder their ability to fulfill their fiduciary duties.[43] Bringing Louisiana into the modern age, the LBCA puts that outdated policy to rest by giving shareholders broad discretion to structure the governance of their organization through what the LBCA calls “unanimous governance agreements.”[44]

Under the LBCA, shareholders may enter a special unanimous agreement that has the power to override otherwise statutorily-required rules regarding the governance of their organization.[45] This new contractual freedom allows the shareholders to completely do away with the traditional corporate structure that was required under the old law. For instance, the shareholders can even agree to abolish the board of directors and place the entire control of the corporation in the hands of one person.[46]

As noted above, shareholder agreements that purported to give certain rights to minority shareholders by limiting the discretion of the board of directors in some way would have been struck down as violations of public policy prior to the enactment of the LBCA. Under the LBCA, such agreements are expressly permitted. As a result, through the power of a unanimous governance agreement (UGA), minority shareholders now have the ability to negotiate for such rights as guaranteed representation on the board of directors, continued employment with the organization, and regular dividend payments.

Commentators have identified at least two shortcomings of using shareholder agreements as a means to protect minority shareholders from oppressive conduct by the corporation.

First, to the extent that a unanimous governance agreement can benefit minority shareholders, it can also harm them. The UGA provisions in the LBCA simply provide for greater freedom of contract with regard to structuring the governance of corporations. Furthermore, as one commentator has observed, “the move to increasing contract rights has led to a concomitant ability among investors to decrease their fiduciary obligations.”[47]

For instance, consider the LBCA’s definition of oppression, which states that any unanimous shareholder agreement will be taken into account when determining whether a corporation has engaged in oppression.[48] If shareholders of a corporation were to execute a UGA that explicitly denies certain participation or financial rights to minority shareholders, then those shareholders will have a much tougher time proving oppression.

A second disadvantage of UGAs as protective measures for minority shareholders is that investors in closely held corporations often do not feel the need to contractually protect themselves at the outset of their investment.[49] Scholars have said that this trend is caused by the fact that many investors in closely held corporations are relatively unsophisticated and often have an overly trusting nature that prevents them from anticipating the possibility that they will be treated unfairly.[50]

Conclusion

The LBCA arms minority shareholders with several new protective measures in the hope of creating a fairer environment for those invested in closely held corporations. Although these measures are not without their drawbacks, they effectively target problem areas that could have been used to exploit minority shareholders under the old law. Furthermore, the LBCA brings Louisiana’s minority shareholder protections in line with those offered by a majority of U.S. jurisdictions.

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[1] La. Rev. Stat. Ann. §§ 12:1-101–1704 (Supp. 2015).

[2] Glenn G. Morris, The Model Business Corporation Act as Adopted in Louisiana, La. Bankers Association (2014) (unpublished educational material), available at http://www.lba.org/files/Glenn%20Morris%20-%20The%20New%20Business%20Corporation%20Law.pdf, archived at http://perma.cc/MB94-UEAC.

[3] Douglas K. Moll, Shareholder Oppression and the New Louisiana Business Corporation Act, 60 Loy. L. Rev. 461, 467 (2014).

[4] Id.

[5] See La. Rev. Stat. Ann. § 12:1-1435(C) (Supp. 2015). “Fair value” for purposes of the oppression remedy is defined as “the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the shareholder objects, using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status.” Id. § 12:1-1301(4).

[6] Id. § 12:1-1435(B).

[7] Id.

[8] Moll, supra note 3, at 477.

[9] See Model Bus. Corp. Act. §§ 14.30–34 (2011).

[10] Id.

[11] La. Rev. Stat. Ann. § 12:1-1435(L) (Supp. 2015).

[12]  Id. § 12:1-1438(A).

[13]  Id. § 12:1-1435 cmt. b.

[14] See id. § 12:1-1301(4). In some jurisdictions, courts have interpreted “fair value” to mean the price at which a willing buyer would pay in an open market. Accordingly, these courts will discount the value of minority shares in a closely held corporation in order to reflect the reality that minority shareholders lack the ability to control the organization or otherwise liquidate their investment. Moll, supra note 3, at 498.

[15] Moll, supra note 3, at 498; McMillan v. Bank of the South, 514 So. 2d 227 (La. Ct. App. 1987).

[16] La. Rev. Stat. Ann. § 12:1-1301(4) (Supp. 2015).

[17] Moll, supra note 3, at 501.

[18] Id. at 502.

[19] Id.

[20] Id. at 495.

[21] La. Rev. Stat. Ann. § 12:1-1436(E) (Supp. 2015).

[22] Model Bus. Corp. Act. § 14.34(e) (2011).

[23] Moll, supra note 3, at 495.

[24] Id. at 489–91.

[25] Id.

[26] See La. Rev. Stat. Ann. §§ 12:1-1301–1340 (Supp. 2015).

[27] Former La. Rev. Stat. Ann. § 12:131 (repealed 2015).

[28] La. Rev. Stat. Ann. § 12:1-1302(A) (Supp. 2015).

[29] Former La. Rev. Stat. Ann. § 12:131(C)(4) (repealed 2015).

[30] Id.

[31] Id. § 12:131(D).

[32] Id. § 12:131(E).

[33] McMillan v. Bank of the South, 514 So. 2d 227 (La. Ct. App. 1987).

[34] La. Rev. Stat. Ann. § 12:1-1320 (Supp. 2015).

[35] Id. § 12:1-1322.

[36] Id. §§ 12:1-1320(D), 1-1322.

[37] Id. § 12:1-1324(A).

[38] Id. § 12:1-1326.

[39] Id. § 12:1-1301(4).

[40] Id. § 12:1-1340(B).

[41] Id. § 12:1-1340(D). Such advance notice was required under the old law. Former La. Rev. Stat. Ann. § 12:131(C) (repealed 2015).

[42] Goldblum v. Boyd, 341 So. 2d 436, 446 (La. Ct. App. 1976).

[43] See id.

[44] La. Rev. Stat. Ann. § 12:1-732 (Supp. 2015).

[45] Id.

[46] Id. § 12:1-732(B)(1).

[47] Michael K. Molitor, Eat Your Vegetables (Or at Least Understand Why You Should): Can Better Warning and Education of Prospective Minority Owners Reduce Oppression in Closely Held Businesses?, 14 Fordham J. Corp. & Fin. L. 491, 543 n.224 (2009) (quoting Mary Siegel, Fiduciary Duty Myths in Close Corporate Law, 29 Del. J. Corp. L. 377, 466 (2004)).

[48] La. Rev. Stat. Ann. § 12:1-1435(B) (Supp. 2015).

[49] Molitor, supra note 47, at 563.

[50] Id. at 564.