28 / June 2023

How to Build a Shareholder Oppression Case—Against Yourself!

Posted in: Business Valuation Law News Written by: Jim Alerding

In Mekhaya v. Eastland Food Corp.,1 the plaintiff, Edward Mekhaya, pleaded a statutory claim for shareholder oppression.2 In October 2018, Mekhaya was fired from his position at Eastland, where his salary of $400,000 per year included an implied dividend. The implied dividend was also included in the salaries of the other shareholders, all relatives of Mekhaya.  

Mekhaya’s firing occurred a day after Mekhaya’s brother was named CEO.3 Mekhaya pleaded a statutory claim for shareholder oppression. The defendants filed a motion to dismiss, which the District Court granted. The plaintiff appealed. He noted that, after his removal, they paid themselves excessively high salaries and refused to pay him dividends, thus frustrating his expectations as a shareholder.

The defendants moved to dismiss the complaint, noting that Mekhaya failed to state any claim for which relief could be granted. The district court judge dismissed the complaint, noting that there was “no confirmed basis that [the claimed dividend] was ever viewed as a dividend [or that the salary was viewed as a dividend] in this matter.” The plaintiff appealed the order of dismissal.

Not surprisingly, the Appellate Court of Maryland disagreed with the decision of the trial court. Four excerpts from the Appellate Court’s decision frame the essence of the questions to ask and the court’s answer of its own question:

The question we ask ourselves, therefore, is whether the de facto dividend claimed by Mekhaya, or the majority shareholders’ refusal to expressly declare a dividend, could be an objectively reasonable expectation by him, according to the circumstances set out in the complaint. If so, we ask then whether the majority shareholders’ actions defeated substantially that expectation and whether Mekhaya’s requested relief was within the circuit court’s powers to grant.

[T]he question is not whether Mekhaya’s expectation in receiving a de facto dividend as part of his salary was ever "confirmed" or expressly declared as a dividend by Eastland. The question, rather, is whether Mekhaya’s complaint, on its face, alleged facts sufficient to establish that his expectations as a shareholder were reasonable (when viewed through an objective lens) and that Appellees defeated substantially one or more of those expectations.

Mekhaya’s complaint advanced such a showing. As noted earlier, Mekhaya’s flagship allegation was that, as a shareholder, he expected to share in company profits by receiving a de facto dividend as part of his salary. That expectation was reasonable, despite the fact that Eastland never declared officially a dividend. Thus, when Appellees terminated Mekhaya’s employment and stopped paying his salary, thereby depriving him of the de facto dividend portion, arguably Appellees defeated substantially Mekhaya’s asserted reasonable expectation as a shareholder. Those allegations are sufficient to state a claim for shareholder oppression. Again, whether Mekhaya can prove those facts is immaterial to the stage of these proceedings as they reach us here.

In addition, Mekhaya alleged that, following the termination of his employment, Eastland’s board of directors continued to refuse to declare expressly a dividend, despite the fact that Eastland was "quite profitable." According to Mekhaya, instead of declaring a dividend, Eastland’s board chose to pay "excessively high salaries" to Oscar and Vipa. Those actions, if proven, could be considered shareholder oppression, particularly if the majority’s actions left Mekhaya with a "worthless asset.” 
 
And, as noted, the court answered its own question and provided the solution.“[I]f Mekhaya can prove that Eastland had been paying a ‘constructive’ or ‘de facto’ dividend to its shareholders, employees or directors, that he reasonably expected to receive that benefit, and that Appellees defeated substantially that expectation, the court has the power to order ‘affirmative relief by the required declaration of a dividend or a reduction and distribution of capital’ and award ‘damages to minority stockholders as compensation for any injury suffered by them as the result of "oppressive" conduct by the majority in control of the corporation.’” Mr. Mahler has constructed a well-organized summary of this rather lengthy case and comes to the correct conclusion that having well-organized agreements covering the needs of both minority shareholders and reasonable buy-sell provisions protecting both minority shareholders and the purchasers of their stock or units. Unfortunately, too many businesses lack these badly needed agreements, resulting in issues similar to the one in this case. In a following blog post, I will provide several real-life instances from my own experience of where a lack of agreements can wreak havoc to shareholders.

1 Mekhaya v. Eastland Food Corp., 287 A.3d 395; 2022 Md. App. LEXIS 938; 256 Md. App. 497; 2022 WL 17843057.
2 This post is based on an article in nybusinessdivorce.com, March 2023; “Grounds for Dissolution—When Do Disguised Dividends Add Up to Minority Shareholder Oppression,” Peter Mahler. The article itself is based on the opinion of the court cited above. Some sections of the article and/or the opinion may be noted in quotation marks.
3 Mekhaya’s father had also been fired, and the prior CEO had also been fired around the same time.
4 As also cited in Mahler’s article.

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