Unfortunately, shareholders in small corporations, often family-run businesses, can have shareholder disputes that result in bruised egos and hurt feelings. Shareholders can make claims of mismanagement. Minority shareholders may have very little say in the day-to-day operation of the business. They may feel the controlling shareholders are abusing their authority by failing to pay dividends or by paying themselves overly generous salaries, bonuses, etc. Shareholders facing problems like these may want to turn to the New Jersey shareholder dispute attorneys at Schiller, Pittenger & Galvin, P.C., for help.
New Jersey Oppressed Shareholders Act
The New Jersey Oppressed Minority Shareholders Statute (N.J.S.A. 14A:14-7) (the “Act”) protects minority shareholders from unlawful and oppressive acts by the majority or controlling shareholders. The protections afforded by the Act apply to closely held corporations with 25 or fewer shareholders.
Under the Act, minority shareholders may seek the intervention of a judge when majority shareholders act fraudulently, mismanage the business or abuse their authority as officers or directors of the business.
In addition, the Act prohibits the majority shareholders from acting oppressively or unfairly towards one or more minority shareholders in their capacity as officers, directors or employees of the corporation.
Cases involving the “oppression” of minority shareholders arise frequently in New Jersey. Consequently, there is a great deal of case law which discusses the oppression of minority shareholders.
In general, minority shareholder oppression is conduct by the controlling shareholders that “frustrates the reasonable expectations of the minority shareholder.” For example, a long-time minority shareholder who is also an employee has a reasonable expectation that he is going to continue as a salaried employee. If management fires him without a good reason, or his compensation is significantly reduced, they have not met his reasonable expectation of continued employment and a salary.
Shareholders Have a Fiduciary Duty
Shareholders, both those in the majority and minority, owe the corporation and other shareholders a fiduciary duty. This duty requires shareholders to act in good faith. Therefore, if majority shareholders violate that fiduciary duty, and harm one or more minority shareholders, the minority shareholders may have a cause of action under the Act against the majority shareholders.
In addition, while we use the terms “majority” and “minority” shareholders, courts have ruled that the number or percentage of shares held by a shareholder may not be the key issue. Rather, the issue is which shareholders have the power to act on behalf of the corporation. This contrasts with the shareholders who have little or no authority to make corporate decisions.
Therefore, shareholders who control the corporation can oppress the shareholders who have little or no power to take corporate action.
What Remedies Can Oppressed Shareholders Seek?
If the shareholders cannot amicably resolve the dispute, the oppressed shareholders can sue. In New Jersey, battling shareholders often sue in the Chancery Division of the Superior Court.
The Chancery Court is a court of “equity.” The Chancery judge is not limited to awarding damages in a civil case. Instead, the Chancery judge can issue injunctions and order parties to take certain actions (or stop taking action).
The Act details several remedies that courts can take when handling an oppressed minority shareholder case:
Removal of an officer or director
The court can order the removal of an officer or director who is acting fraudulently or mismanaging the corporation.
Conversely, the court can order that the corporation restore an officer or director who has been improperly removed.
Appointment of a receiver or provisional director
If the shareholders’ dispute affects the operation of the business, the court could appoint a receiver, fiscal agent or custodian to run the business until the dispute is resolved. Alternatively, if the corporate directors are deadlocked, the court can appoint a provisional director. That director can then make corporate decisions so the corporation can operate during the disputes.
Court-ordered buy out
On the motion of a party, or on its own, the court can order one set of shareholder parties to the suit to buy out the other set of shareholders. Formerly, it was usually the majority shareholders who bought out the minority shareholders. However, a court can also order the minority shareholders to buy out the majority.
In effect, because of the feud between the majority and minority shareholders, the court will have to decide who is the oppressed and who is the oppressor. Additionally, the court will decide who gets to keep the corporation.
Sale of the corporation to a third party
With irreconcilable differences, the court may order the shareholders to sell the corporation to a third party.
Dissolution of the corporation
In extreme cases, the court could order the dissolution of the corporation. However, this is the last option for a court. Although a rare occurrence, the court may do it if one or more of the shareholders committed fraudulent acts. The court would dissolve the corporation to stop the fraudulent activity and protect innocent shareholders and creditors.
Valuing the Corporation-Fair Value is not the Same as Fair Market Value
In case of a buyout, the corporation will have to be valued. Typically, the shareholders will agree on an appraiser. Or the court can appoint one if the shareholders cannot agree.
Since this is the sale of a privately held corporation, there is a marketability interest discount (the sale of the corporation is more difficult because it is privately held) for both the majority and minority shares.
If the minority shareholders sell their shares to a third party, there is a minority interest discount (minority shares are less valuable because minority shareholders have little to no power to run the corporation and the shares are illiquid).
However, if the majority shareholders are ordered to buy the shares of the oppressed minority shareholders, that minority interest discount, which would lower the per share sale price, will not be applied. The courts recognize that if the majority shareholders are oppressing the minority shareholders, the court should not reward their oppressive conduct by applying the discount.
Additionally, minority shareholders are entitled to be paid the fair value of their shares. However, fair value is not the same as fair market value. That is because there may not be much of a market for the minority shares of a closely held corporation.
Instead, fair value in an oppressed minority shareholder suit means the pro rata value of minority shareholder’s shares. This is done without factoring in the lack of control or liquidity associated with minority shares.
Awarding Attorneys’ Fees and Costs
Under the Act, the court can award the plaintiff attorneys’ fees and costs. The court has discretion whether to award fees; not every winning party gets an award of fees.
However, if the losing party acts arbitrarily or in bad faith, the court is more likely to award fees to the winning side.
New Jersey Shareholder Dispute Lawyers
Minority shareholders sometimes get pushed around by majority shareholders-and think there is not much they can do about it. On the other hand, not every decision by majority shareholders that a minority shareholder doesn’t like is “oppression.” If you find yourself in one of those situations, you may need experienced New Jersey shareholder dispute attorneys. Contact the shareholder dispute attorneys at Schiller, Pittenger & Galvin, P.C., at 980-490-0444. You can email them here.