Balvik v. Sylvester - 411 N.W.2d 383 (N.D. 1

Rule:

Forced dissolution of a corporation is a drastic remedy which should be invoked with extreme caution and only when justice requires it. In a sense, a forced dissolution allows minority shareholders to exercise retaliatory oppression against the majority. Although N.D. Cent. Code § 10-21-16 mentions only dissolution as a remedy for oppressive conduct, alternative equitable remedies not specifically stated in the statute are allowed.

Facts:

In November 1979 Elmer Balvik and Thomas Sylvester formed a partnership, Weldon Electric, for the purpose of engaging in the electrical contracting business. Although Sylvester's contribution under the terms of the articles of partnership was 70 percent, and Balvik's was 30 percent, both partners had an equal vote and equal rights in the management of the business. The parties continued operating the business as a partnership until 1984, when, at Sylvester's urging, they decided to incorporate. Stock was issued to Balvik and Sylvester in proportion to their partnership ownership interests, with Sylvester receiving 70 percent and Balvik receiving 30 percent of the stock. Sylvester and his wife and Balvik and his wife were the four directors of the corporation, with Sylvester being elected president and Balvik being elected vice-president. The bylaws of the corporation provided that a shareholder was entitled to one vote for each share of stock owned; thus Balvik held only a minority voice in the management of the corporation. In 1985 problems arose between the parties concerning their differences in philosophy of management of the corporation. Sylvester wanted excess profits reinvested into the corporation while Balvik wanted them withdrawn and paid out as bonuses or dividends. Sylvester also questioned Balvik's job performance. According to Balvik, during August 1985 he was fired as an employee of the corporation. According to Sylvester, Balvik was removed from his position as the foreman on a job the corporation was performing for the Ladish Malting Company in Spiritwood, but was not "fired" from his position with the corporation. In any event, Balvik no longer came to work for the corporation and began drawing unemployment benefits.  In October 1985, Balvik brought this action seeking Weldon's dissolution or, in the alternative, that he be paid the "true value" of his stock. He also sought punitive damages. Balvik alleged that Sylvester had breached a fiduciary duty he owed to Balvik and that Sylvester had been guilty of oppression and malice by discharging him from employment with the corporation. Balvik also alleged other instances of misconduct by Sylvester and asserted that he had "reasonable expectations . . . that he would be treated as a partner,  furnished employment and not discharged merely because he did not hold an equal amount of stock." In January 1986 Weldon held its annual shareholders meeting. On the strength of Sylvester's 70 percent of the voting shares, the bylaws were amended to reduce the number of directors from four to three, and to reduce the number needed for a quorum from three to two. Sylvester, his wife, and Peter Sylvester were voted in as the new directors of the corporation. The directors then voted in Peter Sylvester as the new vice-president, removing Balvik from that office. It does not appear from the record that Weldon has declared a dividend or that Balvik has received any money from the corporation since August 1985. The trial court ruled in favor of Balvik, finding that Sylvester had discharged Balvik from his employment with the corporation and had discharged Balvik and his wife as members of the board of directors, leaving Balvik without any benefit from his 30-percent ownership in the corporation. The court concluded that Sylvester, through a series of acts culminating with the January 1986 shareholders meeting, effectively prevented Balvik "from participating in the management or operation of Weldon Corporation, thus constituting 'oppressive' behavior under Sec. 10-21-16, N.D.C.C., and establishing sufficient grounds for the dissolution of Weldon Corporation." This appeal followed.

Issue:

Did Sylvester's actions amount to oppressive conduct under N.D. Cent. Code § 10-21-16(1)(b), sufficient to justify the forced dissolution of the corporation?

Answer:

No.

Conclusion:

The court held that while Sylvester's cumulative actions amounted to oppression within the meaning of § 10-21-16(1)(b), the forced dissolution and liquidation of the corporation was unduly harsh because the corporation was an on-going business. Balvik had been fired as an employee of the corporation, which destroyed the primary mode of return on his investment. In addition, Balvik’s removal as a director and officer of the corporation had the ultimate effect of freezing him out of a business in which he reasonably expected to participate. As a result, Balvik was entitled to relief. The appropriate remedy was for Sylvester to pay to Balvik the true value of his stock in the corporation at a price determined by the court to be the fair value.