Minority Shareholder Rights Under the Oppressed Minority Shareholders Statute
First off, let’s be clear about one thing. Not every action and decision taken by a majority of shareholder(s) constitutes actionable misconduct and shareholder oppression.
Our courts will consider whether the alleged misconduct by the majority places a minority shareholder’s investment at risk.
Then the court will consider whether the misconduct negatively affects the minority shareholder’s reasonable expectations of his or her role in the corporation.
MINORITY SHAREHOLDER RIGHTS
Minority shareholders in closely held corporations often find themselves on the outside looking in when it comes to managing the daily affairs and making important corporate decisions. Allegations of oppression often occur when shareholders in a closely held corporation consist of family members or friends and the personal relationships between them deteriorates; or when minority shareholders become dissatisfied with the management by the majority shareholders of the corporation.
The New Jersey legislature has responded to the concerns of minority shareholders by enacting the “Oppressed Minority Shareholder Statute”. The Oppressed Minority Shareholder Statute was enacted to protect minority shareholders against shareholders, directors and officers of closely held corporations that have (i) acted fraudulently or illegally, (ii) mismanaged the corporation, (iii) abused their authority as directors or officers, or (iv) acted oppressively or unfairly toward one or more minority shareholders. The statute, coupled with a series of cases decided by New Jersey courts over the course of the past twenty-five years of interpreting the law, have afforded minority shareholders, substantial protection against oppressive conduct. Interestingly enough, the percentage of stock that a shareholder owns does not necessarily determine whether or not a shareholder is considered a minority shareholder. In one decision, the court found that the plaintiff (a 98% shareholder of a company) was an oppressed minority shareholder because the stock was held in a voting trust which was controlled by the owner’s father and the shareholder had no control over the stock. Along that line, New Jersey courts have interpreted the meaning of “minority shareholder” loosely, allowing any shareholder to claim protection under the statute if the shareholder can prove, irrespective of the percentage of stock he/she owns, that he/she lacks sufficient control over the affairs of the corporation and is being oppressed by those shareholders in control.
Shareholder Rights; Oppressed Minority Shareholder Rights
A shareholder in a closely held corporation will be wise to remember that if “frozen out” of corporate decisions, he or she may have significant rights under New Jersey law. If oppression is happening to you or as a majority shareholder you are being accused of illegal behavior, then there are steps you should take. A shareholder should continuously document the acts of the majority or the minority shareholders that he/she disapproves of; because acquiescence in inappropriate corporate acts can be used as a defense by the majority shareholders or minority shareholders should litigation be filed. Furthermore, if a shareholder feels that the majority shareholders are mismanaging the corporation, he/she should exercise his or her statutory right to access the records of the corporation to determine if the majority shareholders are mismanaging the corporation and wasting corporate assets. In the event that a review of the corporate records proves that the majority shareholders have mismanaged the corporation, subjecting the minority shareholder to oppression resulting in a loss of stock value, he/she should seek legal counsel and protection under the “Oppressed Minority Shareholder” statute.
The New Jersey Oppressed Minority Shareholder Act has protected the rights and interests of minority shareholders in closely held corporations, with twenty-five or fewer shareholders, against oppressive conduct.
If a minority shareholder believes a case of oppression exists, the shareholder has the right to commence litigation against the majority shareholders. In the event that litigation is initiated, a court will fashion a remedy appropriate, given the facts of the case. If oppression is found to exist, one of the most common remedies is to appoint a custodian or provisional director to run the corporation’s daily affairs until the shareholder dispute is resolved. In the alternative a judge can, under appropriate circumstance, order a sale of the corporation’s stock, or enter judgment to dissolve the corporation. A judgment dissolving a corporation is a very drastic remedy and will only be ordered by the court if the court finds that the corporation has been irreparably harmed and is likely to go out of business or defraud the public or creditors. Another common remedy that a court will use in resolving shareholder oppression claims is to order a buy out of the stock of one or more of the shareholders involved. The usual scenario is for the court to order the majority shareholders to buy out the minority shareholder’s stock. However, in special circumstances, courts have ordered the minority shareholder to buyout the majority shareholders’ stock interest. This is generally not the outcome but there are several reported cases when the judge has required the majority shareholders to sell their stock to the minority shareholder at fair value. If you are a minority shareholder who perhaps has been operating the corporation continuously for a period of time and are now being forced out by the majority and you believe your rights as a shareholder are being violated by the majority then contact me immediately. Delaying your response can be detrimental to your case.
In some instances, the court may apply a “fair value” standard to establish the value of the company. “Fair value” is a valuation technique intended to fairly compensate a shareholder for the value of his or her stock ownership and may differ from a stock’s “fair market value.” In establishing fair value, consideration is given to the fact that an impartial buyer may not be willing to buy a small stake in a closely held corporation. In appropriate circumstances, a court may apply a “marketability” and/or “minority interest” discount to the valuation of the stock. Marketability discounts are applied to reflect the fact that there is only a small pool of potential buyers for the stock held by the minority shareholder and finding a market for the sale of the stock to an outside buyer would be difficult. Minority interest discounts may be applied when it is determined that any outside purchaser will also lack control over the corporation, so the “minority interest discount” will reflect a downward adjustment to the value of the minority shares.
ATTORNEY’S FEES AND EXPENSES IN SHAREHOLDER RIGHTS LITIGATION
In a Shareholder Rights case, the Chancery court has the authority to award to a winning shareholder reasonable attorney’s fees and costs (including costs of retaining experts) incurred in litigation with the company. In addition, if a court determines that a party acted “arbitrarily, or otherwise not in good faith”, it may award reasonable expenses to the injured party or parties, including counsel fees. Not every party who wins an oppressed shareholder suit, however, will be awarded fees. A court may award attorney’s fees to (a plaintiff or defendant) if the Court determines that the other party in the litigation acted arbitrarily or otherwise in bad faith. Often the conduct of the losing side must be highly offensive or shocking to an impartial observer. Bona fide disputes and good faith difference of opinion do not qualify for award of fees and expenses.
Are you a majority shareholder or a minority shareholder in a new corporation having issues that can’t be settled? Contact me personally today to discuss your shareholder matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at firstname.lastname@example.org.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County New Jersey Shareholder Rights Attorney