The Ohio Supreme Court in the seminal case Crosby v. Beam, 47 Ohio St. 3d 105 (1989) set forth protections for Ohio minority shareholders. Minority shareholders sought redress via the Ohio courts. In their complaint, the minority shareholders alleged that the majority shareholders had oppressed them by: (1) awarding themselves unreasonable salaries; (2) using corporate property for their personal enterprise; (3) having the company purchase life-insurance only for the majority’s benefit; and (4) taking improper, low-interest loans from the company.
In deciding the case, the Ohio Supreme Court first had to consider whether or not the minority shareholders could maintain their claims against the majority shareholders in their individual capacities. The defendants argued that the plaintiffs could only assert those claims derivatively pursuant to Ohio Civ. R. 23.1. The majority argued that Plaintiff’s complaint only alleged that the defendants’ misappropriation of corporate funds directly affected the corporation and only indirectly harmed the Plaintiffs. “A shareholder’s derivative suit is brought by a shareholder in the name of the corporation to enforce a corporate claim.” Crosby v. Beam 47 Ohio St. 3d at 107. If the Ohio Supreme Court found that the claims could only be asserted derivatively than Ohio would not have embraced the individual minority shareholder’s right to assert individual shareholder claims.
Fortunately for minority shareholders in closely held Ohio corporations, the Ohio Supreme Court held that they could individually assert minority oppression claims. The Crosby decision is the genesis of the minority oppression claim in Ohio. The Ohio Supreme Court recognized the vulnerabilities associated with being a minority shareholder in a closely held company. The Ohio Supreme Court recognized that the close corporation structure gives the “majority or controlling shareholders opportunities to oppress the minority shareholders.” Id. That is because “a close corporation is a corporation with few shareholders and whose corporate shares are not generally traded on the securities market. Id. (citing, 1 O’Neil & Thompson, O’Neal’s Close Corporations (3 Ed. 1986) 2-3, Section 1.02). In addition, in reaching that conclusion the Ohio Supreme Court reasoned that like “a partnership, the relationship between the shareholders must be one of trust, confidence and loyalty.” Id.
After finding that the Plaintiffs could assert the claims in their individual capacities the Ohio Supreme Court defined the fiduciary duties the majority shareholders owed the minority in closely held Ohio corporations. The Ohio Supreme Court defined “the standard of a duty to be of the ‘utmost good faith and loyalty.’” Crosby v. Beam, 47 Ohio St. 3d at 108. The Court held “a majority shareholder has a fiduciary duty not to misuse his power by promoting his personal interests at the expense of corporate interests.” Crosby v. Beam, 47 Ohio St. 3d at 108-109.
Next, the Ohio Supreme Court found that Ohio Courts of equity “will grant appropriate relief where the majority or dominant group of shareholders act in their own interest or in the interest of others so as to oppress the minority or commit fraud upon their rights.” Crosby v. Beam, 47 Ohio St. 3d at 109. In doing so, the Ohio Supreme Court empowered Ohio trial courts to use their equitable powers to address actionable oppression. In doing so, the Ohio Supreme Court gave Ohio trial courts the power to order a buy-out or other forms of equitable relief when oppression or fraud is found.
The Crosby decision is an extremely important case because it is the genesis of the minority oppression claim in Ohio. The decision not only recognizes the cause of action it defines the fiduciary duties the majority or dominant shareholders owes the minority in Ohio closely-held companies.