Shareholder Oppression: Are You Entitled to Lost Profits and the Loss of Value?

Author: Chris Young, PhD

So often I hear client advocates and other economic, finance, or accounting experts say that you cannot pursue lost profits, while at the same time seeking to pursue a buyout of your shares in Shareholder Oppression cases. Sometimes the advocate will suggest that this is a – "double recovery."

Hogwash – Gibberish – Rubbish!!

When you seek economic damages from cases where Shareholder Oppression is the claim and assuming you prove liability, you are entitled to the loss of historical profits. The historical lost profits are calculated from the time the oppression begins (or is identified), and up until the verdict. In other cases, it depends upon the trier-of-fact, and sometimes the date of suit. Many of the oppression cases we have worked on, where there was liability proven, we often find financial misappropriation. In this sort of embezzlement, we almost always find a diversion of corporate assets to the oppressor's personal accounts. Sometimes this diversion occurs by having the corporation pay for personal expenses, such as a child's college, exotic cars, vacations, lavish gifts, and the list goes on. It is important to note that had these funds not been diverted, then the defendant would most likely have received a much higher distribution in each of the years analyzed. The defendant would be entitled to their respective share of these diverted funds. 

You are also entitled to future perpetual profits after making adjustments to the financial statements, for the wrongful behavior of the oppressor. This is a valuation. When performing a valuation, it is crucial to restate the historical financial statements by adding back the misappropriated funds to the company's profits. By making this adjustment, the valuation professional can appropriately value the shares into the future. 

You can also seek to have your award adjusted upward for the loss of interest (pre-judgment and post-judgment interest) that you would have received on your historical lost profits. You can also request to have your economic award adjusted for the very high taxes you will most likely pay on that award. The latter is required because you will receive the award in a lump sum payment, which will trigger a very high tax rate for the plaintiff in the year of the award. [see Michael S. Knoll and Jeffrey M. Colon, The Calculation of Prejudgment Interest,?" U of Penn Law School, Public Law Working Paper No. 06-21 (May 31, 2005). Available at SSRN: ssrn.com/abstract=732765.]

If you are also a working shareholder and was terminated, and assuming this termination was wrongful and or due to the oppression claim, then you can also seek the loss of historical compensation. This compensation should be adjusted for the expected growth in your labor price. 

As a way of example, I recently worked on a case where the defendant's expert argued that the plaintiff was only entitled to the value of their shares. In this case, the defendant's expert prepared a valuation but failed to consider or make adjustments to the financial records for the misappropriations, and also failed to find the loss of wages and benefits and the loss of the historical profits. The defendant's expert prepared a valuation, suggesting that the plaintiff's shares were worth approximately $350,000. We calculated the damage to the plaintiff equal to $2,700,000. The major differences between our report and the defendant's expert is that we valued the loss of historical profits, the loss of wages, and the value of the shares. We adjust for the loss of interest and make adjustments for the unfavorable tax treatment of the award.

If you have any questions regarding your Shareholder Oppression case, or other cases with similar damage components, such as fraud, breach of fiduciary duty, or tortious interference, please let us give you a view into your entitled losses, before submitting any loss claim.

Chris Young

The Red Maple Group

Office: (973) 545-2891

Direct: (347) 522-0480