Focus on the Relief, Not the Label

Minority shareholders may be entitled to a legal remedy, including possibly a buyout, if they suffer from "shareholder oppression" under New Jersey law. Many clients find that the statute uses both the words "mismanagement" and "oppression" when searching online. From the perspective of a minority owner who believes he is, at best, being taken advantage of, it is difficult to think of what is happening as anything other than “mismanagement.” Despite the statute's numerous protections, it cannot be interpreted too broadly.

Business owners who feel put upon, or oppressed, should realize that courts simply do not like to get involved in the inner workings of a company and, in effect, second guess the wisdom of management decisions. For example, if the majority owner wants to cut staff, while you believe this market presents the best opportunity in a generation for expansion, a court would be hard-pressed to want to get involved in such a dispute. In other words, the type of mismanagement that courts seek to remedy is often more obvious on its face.

If you can demonstrate that the company is a sinking ship and that your investment is frozen in, you are frozen out of receiving information, and you have no way out, the court may look to remedy the situation regardless of what the judge calls it. Whether you are the victim of oppression or mismanagement does not matter if you get the remedy of a buyout.

In one case, the majority owner kept reinvesting every single penny of profit back into the business, never declaring a distribution, leading to long-term returns that certainly called into question the wisdom of the decision. The client initially insisted on labeling the majority shareholder’s conduct “mismanagement,” and he wanted to focus energies on why this was a bad idea for his industry. It was evident that the judge was not sympathetic to the argument, and the case did not seem to be heading in the right direction. Simply put, she was not interested in stepping into the shoes of the decision maker, studying an industry, and figuring out what she would have done. When the client was convinced to change the focus of the case to the fact that his investment was frozen in, with no distributions being paid, and that he was being kept in the dark with critical information – in other words, the unfairness to the minority owner, rather than the stupidity of the decision – the case gained traction with the judge, and the client obtained a favorable buyout settlement. 

In other words, facts alone do not make a shareholder oppression claim. In order to obtain minority shareholder relief, the facts must be properly presented and focused on by an experienced attorney.        

If you have any questions about this post or any other related business law matters, please feel free to contact me at dcroberts@norris-law.com.