Kaplan v. First Hartford and another

(Federal Court of Appeals for the First Circuit)

• Arguing Against an Expansive Definition of "Oppression" Under Maine's Business Corporation Act

This is an appeal of a decision by the federal District Court in Maine that is now pending before the U.S. Court of Appeals for the First Circuit. The plaintiff, who prevailed below, sued First Hartford Corp. (a small, publicly-held Maine Corporation) under the provisions of Maine’s Business Corporation Act (“MBCA”) that permit an “oppressed” shareholder to bring a direct action against the corporation to obtain, inter alia, a buyout of his shares, the relief ordered in this case. The issue on appeal is whether the plaintiff had the right to bring an oppression claim in the first place when virtually all of his claims concern alleged injuries to the corporation’s assets, and not to him personally. That is, the claims belong to the corporation, and not to the complaining shareholder, and therefore constitute the classic derivative action. NELF has filed a brief in support of First Harford, arguing that the shareholder who alleges only harm to the corporation should be restricted to the MBCA’s derivative action requirements and should not be permitted to evade these requirements by invoking the oppression provision. NELF also argued that the oppression provision should only be available to the shareholder who has alleged direct harm, i.e., a loss separate and distinct from that of the corporation and, indirectly, all of its shareholders. Finally, NELF argued that where, as here, the claim belongs to the corporation, the corporation’s board of directors, and not the complaining shareholder, should have the opportunity and autonomy to decide in good faith whether pursuing the claim is in the corporation’s best interests. Moreover, even assuming a meritorious claim, any relief awarded should go the corporation, which is the injured party, and not to the complaining shareholder. Informing NELF’s brief is the fact that the distinction between a shareholder derivative claim and a shareholder direct oppression claim is of great importance to principles of corporate governance, and most courts have firmly upheld that distinction.