When things go bad between shareholders, fights erupt and litigation is most often filed by and against the corporation and the individual shareholders. Once the fight comes to the courts, the following statute is invoked to direct the judge on how to resolve the case and legal issues brought before him/her prior to the case being decided.
N.J.S.A. 14A:12-7 provides:
(1) The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock as provided below, or enter a judgment dissolving the corporation, upon proof that:
(a) The shareholders of the corporation are so divided in voting power that, for a period which includes the time when two consecutive annual meetings were or should have been held, they have failed to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors; or
(b) The directors of the corporation, or the person or persons having the management authority otherwise in the board, if a provision in the corporation’s certificate of incorporation contemplated by subsection 14A:5-21(2) is in effect, are unable to effect action on one or more substantial matters respecting the management of the corporation’s affairs; or
(c) In the case of a corporation having 25 or less shareholders, 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.
(1) A custodian may be appointed if it appears to the court that such an appointment may be in the best interests of the corporation and its shareholders, notwithstanding any provisions in the corporation’s by-laws, certificate of incorporation, or any resolutions adopted by the shareholders or the board. Subject to any limitations which the court imposes, a custodian shall be entitled to exercise all of the powers of the corporation’s board and officers to the extent necessary to manage the affairs of the corporation in the best interests of its shareholders and creditors, until such time as he shall be removed by order of the court or, unless otherwise ordered by the court, by the vote or written consent of a majority of the votes entitled to be cast by the holders of shares entitled to vote to elect directors. Such powers may be exercised directly or through, or in conjunction with, the corporation’s board or officers, in the discretion of the custodian or as the court may order. If so provided in the order appointing him, a custodian shall have the fact-determining powers of a receiver as provided in subsections 14A:14-5 (e) and (f).
(2) Any custodian or provisional director shall report from time to time to the court concerning the matter complained of, or the status of the deadlock, if any, and of the status of the corporation’s business, as the court shall direct. In addition, he shall submit to the court, if so directed, his recommendations as to the appropriate disposition of the action. If, after the appointment of a custodian or provisional director, the court determines that a judgment of dissolution is in the best interests of the shareholders of the corporation, such a judgment shall be entered. The court may continue any custodian or provisional director in such office subsequent to the entry of a judgment of dissolution and until such time as the affairs of the corporation are wound up, or it may appoint such person or another as receiver, as provided in section 14A:12-15.
(3) Upon motion of the corporation or any shareholder who is a party to the proceeding, the court may order the sale of all shares of the corporation’s stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder or shareholders, whichever is specified in the motion, if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case.
(a) The purchase price of any shares so sold shall be their fair value as of the date of the commencement of the action or such earlier or later date deemed equitable by the court, plus or minus any adjustments deemed equitable by the court if the action was brought in whole or in part under paragraph 14A:12-7(1)(c).
Some of the NJ cases that have interpreted this statute have held that:
A court can order sale of stock in a corporation only upon proof that . . . incorporations that have 25 or less shareholders that the majority has acted unfairly or oppressively to the minority. 260 N.J. Super. 432 (App. Div. 1992)
Where there is sufficient credible evidence to support a trial court’s finding that relations between a minority shareholder and a majority shareholder had broken down irretrievably the appropriate remedy was for the majority to buy out the minority.
Fraudulent and illegal acts by a majority shareholder in a closely held corporation may also be the basis for recovery by a minority basis – the minority shareholder need not show oppression.
A refusal by a defendant corporation, whose President, Chief Executive Officer, a Director and holder of 50% of the stock of a closely held corporation, to pay dividends constituted “oppression” of plaintiff who held other 50% of corporation’s stock, warranting remedial action by the court, despite the defendant’s contention that policy was permissible exercise of business judgment due to corporations’ need for cash, anticipated renovation expenses and loss of line of credit; defendant and his family members on corporate payroll realized approximately $400,000 per year in salary and other benefits with no compensating alternative benefit for plaintiff, corporation had retained earnings of five million dollars and had cash for liquid assets easily convertible into cash of approximately $1,100,000 and current liability is only $12,000.
If minority shareholders claim that salaries paid to majority shareholder and his son were so high as to be oppressive to minority shareholders and frustrate their expectations so as to allow for statutory relief (i.e., compensation that goes from $220,000 before death of the founder of the corporation who was the father of majority shareholder, to $340,000 one year after his death. The minority shareholder’s burden of proof of oppression looks to whether the corporation is guilty of a gross failure to maintain an accounting system with properly recorded business and financial transactions. Such a failure would constitute unfair and oppressive conduct within the meaning N.J.S.A. 14A:12-07.
Conclusion
If you are looking for additional details on this topic or if you require advice about your situation, 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 Litigation Attorney