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Bad Faith Is Not Necessary for a Business Divorce
Shareholder oppression – at least in New Jersey – does not necessarily mean you must prove that your business partner is acting maliciously. In fact, he could be a wonderful human being who honestly believes that he is doing the right thing for the business at all times and would never intentionally hurt you or the business. But even acts taken in good faith can constitute minority shareholder oppression and possibly entitle you to a business divorce remedy.
One of the most common areas of disagreement is salary and bonus for the majority shareholder. If your business partner sets his own salary at $350,000, but it should really be only $150,000 on the open market, that does not mean the majority owner believes he is overpaying himself. Very likely, he believes in his heart-of-hearts he “deserves” that salary based on all he does for the company. After all, psychological studies have shown that employees who go so far as stealing from a company believe they are doing nothing wrong since they “deserve” the money based on some perceived “unfairness” that exists. Why would an owner not go through the same psychological self-justification?
If you were to place the company for sale, what would a buyer have to pay someone to do that owner’s job? That is the true reflection of what someone should be paid. In the example above, the majority owner is overpaying himself by $200,000, regardless of whether or not he really believes he “deserves” it. If you are a 1/3 shareholder, $66,666 of that $200,000 effectively belongs to you.
This does not mean that every instance of salary and bonus overpayment constitutes minority shareholder oppression that could justify a business divorce. For example, what if you have known about the overpayment for years and never once complained? Were you in a position where you could complain? These are questions an experienced business divorce attorney can help you analyze. However, it is clear that the majority shareholder’s good faith – his honest belief that he is doing nothing wrong – will not be dispositive of the issue.