Bontempo v. Lare.
In February 2000, Bontempo joined a company founded by the Lares, his former colleague and his wife, as a minority shareholder and employee.[1] The arrangement was later formalized to a certain extent in the form of an attachment to the stockholders agreement, which, as it turned out, inadequately memorialized the parties’ understanding as to the terms of Bontempo’s employment and ownership.[2] Over the years, the company grew and the relationship between the parties soured. The Lares, on one hand, became dissatisfied with Bontempo’s commitment to the business and cut his salary; Bontempo, on the other hand, was concerned that the Lares were taking distributions as shareholders without notifying or providing him with his proportionate shares.[3] In 2010, the parties failed to reach agreement on salaries and distributions, and when Bontempo declined to consider the Lares’ proposals to buy him out, Mr. Lare fired him.[4] Bontempo promptly sued, alleging, among other things, “illegal, fraudulent, and oppressive” conduct of the Lares with respect to him and a breach of contract related to unpaid salary and distributions based on his status as both an employee and a shareholder.[5]
The trial court noted that a minority shareholder who reasonably expects that ownership in the corporation would entitle him to a job, a share of the earnings, and a place in corporate management would be oppressed when the majority seeks to defeat those expectations and there exists no effective means of salvaging the investment.[6] Applying that standard, the trial court found that Bontempo, a founding member of the company who made significant contributions to its later success, was oppressed when he was fired for refusing to sell his shares, but at the same time, he was essentially an at-will employee, with no employment contract or oral agreement.[7] The trial court also found that the conduct at issue did not involve fraud or illegality that warranted a dissolution of the company under Maryland law and that reinstatement of Bontempo as an employee was not a viable remedy.[8] Thus, the trial court concluded that a more appropriate remedy in this case was to order an accounting and reimbursement of a portion of Bontempo’s legal fees and expenses.[9] The intermediate appeals court affirmed.[10]
The case eventually made its way to the Court of Appeals, Maryland’s highest court. Noting that dissolution, the only remedy for oppressive conduct mentioned in the Maryland statute, is equivalent to capital punishment for corporation, the Court of Appeals agreed with the lower courts that dissolution is not the only remedy for oppression.[11] The Court of Appeals observed that less drastic, equitable remedies were possible, such as accounting for allegedly misappropriated funds, appointment of a receiver for the purposes of continued operation of the corporation, issuance of an injunction to prohibit oppressive conduct, and damages to minority shareholders as compensation for oppressive conduct, to name just a few.[12] At the same time, the Court of Appeals agreed with the lower court that reinstatement of Bontempo would be impractical, given the parties’ relationship, and that monetary damages for his termination as an employee would be inappropriate, as Bontempo was an at-will employee.[13] Thus, the Court of Appeals found no error in the lower court’s selection of the equitable remedies and the decision not to award employment-related relief.[14]
As you can see, states have different standards for determining the existence of shareholder oppression and for fashioning appropriate remedies for such conduct. Nevertheless, it is universally advisable to plan ahead and document the parties’ understanding in well-thought-out “business pre-nups,” be it employment agreement, shareholder agreements, buy-sell agreement, etc.
This post was a part of a multi-post blog series on shareholder oppression and related remedies under Maryland law. You can find the other post by searching our blogs at www.mcbrideattorneys.com. If you have any questions about the content of this blog series or other issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] Id. at 3.
[2] Id. at 4.
[3] Id. at 7–8.
[4] Id. at 8.
[5] Id. at 10.
[6] Id. at 12 (emphasis added).
[7] Id. at 12–13.
[8] Id. at 13.
[9] Id.
[10] Id. at 17–18.
[11] Id. at 27–28.
[12] Id. at 26–27.
[13] Id. at 31–33.
[14] Id. at 39.