Shareholder Oppression in New Jersey
By: Samuel Goldman & Associates | Posted: 30th April 2010
The New Jersey Shareholder Oppression Statute, N.J.S.A. § 14A:12-7, provides that when those in control of a corporation having 25 or fewer shareholders "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," the Court can impose a wide variety of equitable remedies, including ordering a buy-out at "fair value." (emphasis supplied).
The buyout that the Court can order does not necessarily have to be of the minority shareholders' interest. It can order a buyout of the majority's interest. The purchaser can be the corporation or the other shareholders.
What is Oppressive Conduct?
Oppressive conduct is defined in New Jersey as conduct that frustrates the "reasonable expectations" of the minority as of when they joined the enterprise.
In Brenner v. Berkovitz (1993), the New Jersey Supreme Court stated that the special circumstances, arrangements and personal relationships that frequently underlie the formation of close corporations generate certain expectations among the shareholders concerning their respective roles in corporate affairs, including management and earnings. A court, then, must determine initially the understanding of the parties in this regard. Generally, the court noted that any increase in benefits to the majority shareholders without corresponding benefit to minority may provide a claim of oppression.
"Reasonable expectations" rights can include the rights to:
* continued employment, including compensation and benefits,
* ongoing participation in management as an officer or director,
* dividends and other profit distributions, and
* maintenance of equity interest, and relief from efforts to be "squeezed out" of ownership.
Each case is decided on its individual merits. Depending on the circumstances, both the declaration of dividends and withholding of dividends can be deemed oppressive.
In one case, the court decided that the declaration of dividends was in fact depriving the general manager of the funds necessary to operate the company, and thus threatened to eliminate his managerial position and benefits from the company altogether. In another, the Chancery court found that a company's failure to pay dividends was oppressive and warranted a buyout because the company had the funds available to pay such dividends (a $5 million surplus) and one member was employed by the company, along with many of his family members, and thus was taking substantial benefits from the company while the complaining shareholder received none.
Available Remedies:
New Jersey courts are given the power to order a wide variety of remedies under the Shareholder Oppression Statute, including the appointment of a custodian or provisional director(s) if it is in the best interests of the corporation and its shareholders. Under the statute, the court may also order the sale of shares of the corporation's stock to either of the parties (a buyout) and reasonable expenses, including counsel fees, against any party to the action that the court has found to have "acted arbitrarily, vexatiously, or otherwise not in good faith."
Though a buyout is the most popular remedy, New Jersey courts have exercised their equitable power to appoint a custodian, order the removal of a director, order the restoration of a wrongfully-removed director, order the appointment of another fiscal agent, order an injunction against future acts of misconduct and order that the corporation give access to its books and records where a complaining shareholder has the right to it.This article is free for republishing
Printed From: http://www.goinglegal.com/shareholder-oppression-in-new-jersey-1527015.html
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Tags: personal relationships, purchaser, merits, dividends, oppression, shareholder, special circumstances, distributions