• Shareholders are often employees of the company they own
• Majority Shareholder will sometimes “fire” and dismiss a minority shareholder as an employee
• This article discusses a recent New Jersey case where the minority shareholder was fired and then sued the company and her co-shareholders
In a recent N.J. case a shareholder with a 12% ownership interest in a small corporation appealed her dismissal as an employee claiming minority shareholder oppression while employed as an at-will employee. She contended that she had a reasonable expectation of continued employment after a thirteen-year history with her former employer, and that her at-will employment designation was irrelevant. The employee had also signed a Shareholder Agreement which stated that she contracted to be an employee at-will.
Facts of the Case
Plaintiff is a closely held real estate management company. Defendant, an accountant, was employed at the company. As an incentive, she became a twelve percent (12%) shareholder pursuant to a Stock Purchase Agreement. The parties entered into a Shareholders Agreement (Agreement) providing stock options to defendant. The Agreement contained a shareholder’s stipulation that she was an “employee-at-will” and that she could be “terminated at any time for any reason.” She agreed that upon termination of employment, the shareholder would be “deemed to have made an offer to sell the shares to a non-selling [S]hareholder and/or the company in accordance with the process for selling shares. Fair market value was to be determined by averaging the appraisals chosen by each party and a neutral appraiser. The company was entitled to redeem the outstanding shares based upon the appraisal methodology described.
Defendant was later terminated; three months later, she instituted suit seeking reinstatement of her employment. In her complaint, she alleged she was an “oppressed shareholder” under N.J.S.A. 14A:12-7(1)(c), based upon her reasonable expectation of continued employment, notwithstanding her at-will employment status. Her complaint was dismissed with the trial court finding that her termination did not constitute shareholder oppression because her termination was authorized under the Agreement, and she had no reasonable expectation of continued employment. The company then filed legal action to compel defendant to sell her shares in accordance with the appraisal method noted above.
The Court’s Analysis New Jersey Shareholder Law
The court first addressed whether management failed to exercise their fiduciary duty to its former employee family. The trial court said it must evaluate a corporation’s need to manage its daily affairs, yet consider what “frustrates the reasonable expectations of a minority shareholder and employee.” The employee said that the president of the company “negligently and/or intentionally mismanage[d] the corporation in an effort to devalue her shares” to her detriment. The judge found that the president of the company always has the right to make the [d]ecisions as to the basic, day[-]to[-]day operations of the company, particularly those decisions concerning marketing, operations, and employment. The Court went on to state “that minority shareholders who are employees know the limitations of their status at the time they make their investment in a small corporation.” As to the buy-out of her shares, the judge found that she signed a Buyout Agreement if she was terminated from her position.
The court next addressed defendant’s contention that her at-will status implied a continued expectation of employment. The judge recognized there is neither a statute, case law, or rule in New Jersey that addresses whether an employee’s at-will status is a relevant consideration in analyzing whether an employee has a reasonable expectation of continued employment. Here, the record contained ample evidence to support the judge’s conclusion that the parties entered into the Agreement and stipulated that defendant was an at-will employee.
What Constitutes Minority Shareholder Oppression
N.J.S.A. 14A:12-7(1) (c) sets forth the circumstances under which a shareholder oppression action may be brought:
[where] the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.
Oppression in the context of an oppressed minority shareholder action, however, does not require illegality or fraud by majority shareholders or directors. Indeed, “[o]ppression has been defined as frustrating a shareholder’s reasonable expectations.
If a court determines that a person is an oppressed minority shareholder, it may in its discretion impose equitable remedies, such as the appointment of a custodian, or the sale of stock. A minority shareholder’s expectations must also be balanced against the corporation’s ability to exercise its judgment to run its business efficiently.
The defendant in this case was not challenging her at-will status. Rather, she urged the court to consider the interplay between at-will status and a minority shareholder’s “reasonable” expectations of continued employment. She asserts that it was error for the court to conclude she was legitimately terminated.
Can a Corporation Fire a Minority Shareholder Employee?
Termination of a minority shareholder’s employment may constitute oppression under N.J.A.A. 14A:12-7(1)(c), because a person who acquires a minority share in a closely-held corporation often does so ” for the assurance of employment in the business in a managerial position.” Such a person can have a reasonable expectation that they will enjoy “the security of long-term employment and the prospect of financial return in the form of salary,” and will have “a voice in the operation and management of the business and the formulation of its plan for future development.” If these expectations are frustrated by majority shareholders or directors, a court may find that oppression has occurred.
The trial judge correctly concluded that defendant had no reasonable expectation of continuing employment with the company and dismissed defendant’s claim. It ordered the buyout of shares as provided for in the Shareholder’s Agreement.
To discuss your NJ Shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon, Niemann & Wright, a Freehold Township, Monmouth County NJ Shareholder Litigation Attorney