A wielding of power by any person or group who controls a corporation may serve to destroy a stockholder’s vital interests and expectations.- As the stock of closely-held corporations generally is not readily salable, a minority shareholder at odds with management policies may be without either a voice in protecting his or her interests or any reasonable means of withdrawing his or her investment.
It is a well-known reality that a corporation is ultimately subject to the control of the owner(s) of a majority of its shares. As a result, any person, family, or group of individuals controlling the majority of the shares, as a practical matter, exercises total power over the corporation. These majority shareholders almost always vote themselves and persons strongly aligned with them to all or most of the officer positions and the board of directors. In closely-held corporations, where the number of shares and shareholders is small, the existence of a single person or a small, strongly aligned group of persons, owning or controlling a majority of the shares is fairly common. Minority shareholders in these corporations are not able to elect officers or directors to protect their interests, and they are not able to prevail on any matter submitted to a vote of the shareholders, and thus have only that amount of influence over the corporation which the majority permits.
Because of the close involvement and personal relationships among the small groups of shareholders of closely-held corporations, the opportunities are greatly increased for interpersonal conflict to arise among shareholders or between management and particular shareholders. As our NJ courts noted, “Occasionally, things don’t work out as planned: shareholders die, businesses struggle, relationships change, and disputes arise. When, as in this case, there is no shareholders’ agreement, minority shareholders who lack both contractual rights and voting power may have no control over how those disputes are resolved.” Because of the absence of a market in which to sell the shares, these shareholders are “locked-in” and vulnerable to a variety of types of misconduct designed to “squeeze” them out (that is, to force them to sell at an unfairly low price) or to “freeze” them out (that is, to render their share ownership meaningless).
So what can be done? Minority shareholders may protect themselves contractually. “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.” Such agreements may define respective management and voting powers, the appointment of losses and profits, the payment of dividends, and shareholders’ rights to buy or sell shares from or to each other, the corporation, or an outside party. However, shareholder agreements are relatively rare, and truly fair and comprehensive ones that solve future problems not anticipated at the founding of the company are rarer still. “[F]rom a relational standpoint, people enter closely-held businesses in the same manner as they enter marriage: optimistically and ill-prepared.” Owners of closely-held corporations are frequently linked by family or personal relationships, usually trust each other, and often regard such contractual protection as unnecessary.
To discuss your NJ shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone 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 Attorney