NJ Shareholder Rights
The rights of shareholders under New Jersey law are commonly referred to as “shareholder rights”. Investors who purchase an interest in a company (commonly referred to as “shareholders”, whether large or small) enjoy a number of rights pertaining to their ownership. Unlike being a partner in a partnership, where each partner is the owner and a co-manager of the business, shareholders are not obligated (but may) run the day to day operations of the company, unless specified to the contrary in their shareholders agreement. This absence of control is what shields shareholders from personal liability for the debts and obligations of the corporation. But being a shareholder is not all risk-free. A shareholder can lose his or her investment of time and money should the corporation fail.
- Shareholder rights are largely dependent upon the details recited in the corporation’s Certificate of Incorporation (charter) filed with the Secretary of State; and
- Its By-Laws; and
- By the terms of any shareholder agreement; and finally
- Corporation laws and regulations. These are the documents and statutes a shareholder should first examine when determining his or her rights in a corporation. Shareholder rights include:
- The right to vote on issues that impact the interests of the corporation
- Rights that relate to the assets and income of the corporation
- Rights that relate to the ownership and transfer of stock
- Rights to receive dividends and profits as declared by the board of directors of the corporation
- Rights to inspect the records and books of the corporation
- Rights to bring legal action against the corporation for wrongful acts by the directors and officers of the corporation
- Rights to share in the proceeds recovered when the corporation liquidates its assets
Shareholders Rights; Shareholders Rights Laws
Shareholder Meetings and Voting Rights
Shareholders are given the opportunity to hold general business meeting(s) on an annual basis or at other times of the year specified in the by-laws of the corporation or shareholder agreement. The primary purpose of these meetings is for shareholders to elect the directors of the corporation, though shareholders may also vote on any number of additional issues that impact the company. If permitted in the by-laws or in a written shareholder agreement, a corporation member (shareholder/stock owner) can also call for a special meeting on any matter(s) that require(s) immediate action. Note however that only those matters listed in the Notice of the Special Meeting served to all shareholders may be voted upon by the shareholders present at the meeting.
A quorum of all shareholders must be present at a shareholder meeting for a decision to be binding. The typical quorum consists of more than half (50%+) of the outstanding shares of the corporation being present and/or represented by the shareholders. The (minimum) percentage of shareholders required to be present for a shareholders meeting may be increased or decreased under the terms of the by-laws of the corporation, previously adopted by the shareholders. Note that the required quorum can be amended during the calendar year upon proper notice to all shareholders and an approving resolution adopted.
If unable to be present at a scheduled shareholder meeting, shareholders may appoint proxies (a Proxy is an authorized representative) to vote their shares, which is common in both small and publicly-held corporations. New Jersey law contains only a few specific rules with respect to proxy voting, primarily addressing when a proxy appointment may be revoked. To be a valid proxy the appointment should be in writing. The person voting the proxy does not have to be a shareholder unless required under the by-laws of the corporation. Since the relationship between the shareholder and the proxy is one of principal and agent, the proxy must abide by the instructions of the shareholder.
Shareholders may also vote and take official business by “Unanimous Consent” without holding a shareholder meeting. Decisions by Unanimous Consent are very common in small closely owned corporations, (corporations with a few members) and these actions are typically non-controversial and are unanimous by agreement. In a larger, publicly held corporation, decisions by unanimous consent are impractical because the decisions of the shareholders affect a larger number of people and the issues are more diverse, controversial and complicated.
Matters, upon which shareholders may vote and take official action (in addition to the election of the directors), depend on the issues affecting the corporation. The following actions constitute the most significant decisions to be voted upon by shareholders.
- Approval or disapproval of changes to the company’s articles of incorporation and/or by-laws
- Approval or disapproval of a merger of the corporation with another corporation
- Approval or disapproval of the sale of substantially all of the corporation’s assets
- Approval or disapproval of the voluntary DISSOLUTION of the corporation
- Approval or disapproval of corporate transactions where some directors have a conflict of interest
- Approval or disapproval of amendments to the BYLAWS
- Recommendations about the governance and management of the corporation by the board of directors
- Admission of new or additional shareholders
- Issuance of additional stock
- Borrowing money
- Selling corporate assets and receivables
Does Always Being “Out Voted” Qualify As Minority Shareholder Oppression
N.J.S.A. §14A:12-7(1)(c) in relevant part establishes the claim of shareholder oppression:
In the case of a corporation having 25 or less shareholders, if the directors or those in control have acted unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees, it is “shareholder oppression”.
So, what does this mean and what can you do if you’re always out-voted by the majority? Is it shareholder oppression?
If a shareholder feels like their input is not being considered or valued in the direction of the company, they may have a case under this statute. Merely being out voted at a shareholder’s meeting or board of directors’ meeting is not enough; there needs to be evidence that the shareholder is being frozen out of discussions and meaningful decision making regarding the company’s future, rendering this person a mere onlooker to the affairs of the business rather than a meaningful shareholder who has a say in the direction of the company. “Ordinarily, oppression by co-shareholders is clearly shown when they have awarded themselves excessive compensation, furnished inadequate dividends, or misapplied and wasted corporate funds.” The cases are less instructive when the issue involves being “out voted” all the time.
Is Termination of Employment Minority Oppression
Often times, shareholder oppression occurs in the context of terminating a shareholder’s employment with the corporation. If a shareholder has been employed with the corporation for a period of time, only to have him or her terminated unexpectedly, the courts have held that an employee/shareholder has a reasonable expectation of being employed within the corporation, and termination of that employment oppresses the shareholder. In one case that dealt with this issue, the New Jersey Supreme Court affirmed a trial court decision ordering the majority shareholders to sell their stock to the minority shareholder after this shareholder “had devoted the most productive years of his life to building up the company” despite one of the majority shareholders being the founder of the enterprise. However, the courts have held that a minority shareholder owning 20% of stock in a restaurant corporation where the shareholder was terminated from employment because he could not get along with the other managers and failed to learn the business, which took him out of management meetings, was not shareholder oppression.
What About Compelling the Corporation to Allow Inspection of Business Records
Can a successful claim of oppression be made when there is lack of access to the financial statements and records of a company? As a shareholder a person has the right to request access to the minutes of shareholder’s meetings and the “record(s) of shareholders meetings,” and to make copies as needed per N.J.S.A. §14A:5-28(3). But a shareholder cannot access any of the “books and records of account” merely by making a request. Instead, he must ask the court to compel inspection of those records. Paragraph (4) of the statute recognizes this cause of action, and allows any shareholder, regardless of the number of shares he or she has or the date upon which he or she obtained his or her shares, to ask the court to compel inspection of these accounting records. The finding that must be made by a court if the issue is litigated is that the shareholder has a “proper purpose” to compel inspection. The statute is drawn from the common law, which allowed courts to compel inspection of a corporation’s records when “the request to inspect was made in good faith and for a purpose germane to the applicant’s status as a stockholder.” Cain v. Merck & Co., 415 N.J. Super. 319, 328 (App. Div. 2010). In the Cain decision, the court held that shareholders are not “entitled to conduct a fishing expedition based on general and unsupported allegations of mismanagement.” Instead they must come forward with “specific and supported, credible allegations of mismanagement before allowing an inspection.” Thus, inspection of business records related to the results of a failed clinical trial of a new prescription drug being tested was a sufficient proper purpose, in the Cain case and the court required the board of directors and shareholder meeting minutes to be produced for inspection only as it related to their discussions regarding the failed clinical test.
Shareholder Rights in Litigation
As noted above, many of the rights available to shareholders are contained in the corporation’s articles of incorporation or bylaws. Some rights are set forth in the state’s corporation laws when not addressed in writing by the corporation or its shareholders. It is also important to recognize that absent agreement to the contrary, shareholders generally do not have the right to vote on the day to day management decisions that occur in the ordinary course of the corporation’s business. Many decisions of the corporation must be made by the board of directors, its officers, and in most cases, shareholders may not compel the board or officers to take or refrain from taking any requested action.
Shareholders can protect their ownership rights in their shares by bringing legal action against a corporation. Such cases may involve contract rights related to their shares; rights granted to the shareholder in a New Jersey corporate law statute; rights related to the receipt of dividends; and rights to examine the books and records of a corporation. Some cases are not appropriate for legal action by a shareholder against a corporation, however. A shareholder may not for example, bring a direct action against a corporation by alleging that an officer has breached a FIDUCIARY duty owed to the corporation. Such a case involves all shareholders and is more appropriate to be brought as a derivative action which I discuss below. By comparison, a shareholder may bring direct action against the corporation if he or she has been prevented from voting his or her shares at a shareholder meeting.
Shareholder Derivative Claims Under New Jersey Law
A shareholder(s) may bring a legal action as a representative(s) of the corporation in a lawsuit known as a “derivative action”. Such an action is designed to prevent wrongdoing by the officers or directors of the corporation and/or to seek a remedy for such wrongdoing. These suits are generally brought when the corporation itself (through its officers and directors) refuses to bring the lawsuit itself through its Board of Directors. A party bringing a derivative suit acts as a representative of all shareholders. In this action the shareholder(s) bring claims that are appropriate against the corporation and its officers and directors. For example, if the officers have breached a fiduciary duty owed to the corporation, shareholders may bring a derivative action to protect the interests of the corporation on behalf of the corporation. While these actions in many cases protect the rights of the corporation and the shareholders of the corporation, these actions are often controversial. Shareholders should study the procedural and substantive provisions of New Jersey law to determine whether the action is appropriate and determine which formalities should be followed with respect to these actions.
Shareholders Rights; Derivative Claims
A Shareholder derivative lawsuit allows individual shareholders to protect their interests in their corporation from the deliberate wrongdoing by the Board of Directors and corporate officers. Sounds big? It is. A derivative claim is not a claim by individual shareholders for their own benefit; rather the shareholder is making a claim which belongs to the corporation. For example, in a shareholder derivative suit, the complaint is brought for the benefit of all stockholders who are similarly situated with the individual stockholder individually and also on behalf of the corporation itself. The main purpose in bringing a derivative suit is to challenge decisions (or lack of same) taken by those in charge which are adverse to the best interests of the corporation.
Contact me personally to discuss your rights as a shareholder of a NJ company. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns and protect your interests. You can reach me toll free at (855) 376-5291 or email me at email@example.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey Shareholder Rights Attorney