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What To Do If Filing Shareholder Dispute Litigation Might Potentially Harm The Company

To negotiate – or to sue?  That is the question when the decision to sue might potentially hurt the company.

A minority shareholder (or LLC member) in New Jersey is often faced with a difficult choice.  Confronted with mounting evidence of shareholder oppression and improper conduct by the majority, minority shareholders may have the right to sue and attempt to force a buyout of their shares.  But what if the lawsuit may harm the company?

For example, if the business is in the marketplace to obtain financing for a certain transaction, like the purchase of expensive equipment, the filing of shareholder dispute litigation may kill the loan.  Or, if the company is actively trying to take on new investors to raise capital, the specter of internecine warfare between and among the shareholders may scare off potential investors.  What then?

Some minority shareholders may think that harming the company harms the majority, so they may welcome the chance to kill such a deal, seeing it as “leverage.”  This may not be advisable, however, as a shareholder should never look to intentionally inflict harm on his or her own company.  Not only would such conduct indirectly harm oneself, but courts never look favorably upon such intentional action.  However, there is no requirement that a shareholder refrain from action that may unintentionally harm the company if such restraint may harm the shareholder’s own interests.  If an action is brought in good faith, the Court may not hold it against you, but of course the potential harm to the company is no less real.

So, what does one do in the above examples?  If you sue, you may cost the company the ability to obtain a much-needed loan, or to bring in a new investor.  But if you don’t sue, the majority may treat you any way they see fit – which is what brought you to a lawyer’s office in the first place.

Perhaps the solution is to sit down with the majority shareholders and attempt to resolve the case even before suit is filed.  Whether this meeting is face-to-face in a conference room, or a formal mediation presided over by a retired judge, it is usually advisable to try to resolve all such disputes before expensive shareholder dispute resolution is commenced.  This is especially so when the interests of the oppressed minority shareholder and the company may not be completely aligned.  If you give the majority shareholders who are treating you oppressively a chance to “do the right thing,” they don’t avail themselves of the opportunity, and you decide you have no choice but to file suit, at least you may do so with a clear conscience.

If you have any questions about this post, or other related matters, please email me at dcroberts@nmmlaw.com.