Minority Shareholder Protection – What Law Applies?
Many of my clients live in other states but own part of a company based here in New Jersey. That is often a recipe for mistreatment of minority shareholders - out of sight, out of mind. But an owner in such a situation has significant protections afforded to them under the law.
If you own shares in a New Jersey-based company but live out of state, New Jersey law protects you. As I have discussed for over 20 years now in this blog, the court can deem that a minority shareholder is oppressed and order - among other things - a buyout of the minority shareholder’s interest. It makes no difference where you live. But the law or even the jurisdiction that applies might not necessarily be based on where the company is physically located. For example, even if the company is based in one state, the shareholders’ agreement (or operating agreement) might require that any lawsuit be brought in another state. Even if that is the case, you still have the protections of New Jersey law.
Also, the fact that the company is located in New Jersey does not make it a New Jersey company. A company might have been created as a creature of one state but be physically located in another. For example, if your company is a Delaware LLC but operates in a state that has minority shareholder protections (like New Jersey), Delaware law likely still applies, and Delaware does not have a minority oppression statute.
So, when you are creating a company, it is critical where you incorporate and what law applies – especially if you are a minority owner. This is especially true since oppressed minority shareholder protections cannot be waived. In one instance, a client shared that in a new venture, his majority shareholder partner initially asked if he (the 20% minority owner) would waive the protections of the oppression statute when they were drafting a shareholders’ agreement. The client was not aware that those protections could not be waived. He was happy to see that his partner dropped that demand, only to insist that the company be a Delaware company operating in New Jersey. When I advised the client that when he agreed to this, he was agreeing to a set of laws that did not protect him, he believed he had been hoodwinked by his partner.
“That’s why he wanted to make it a Delaware corporation!”
The minority shareholder was still able to sue in New Jersey, under Delaware law, for breach of fiduciary duty, but the protections were nowhere near as broad, and the case was more difficult.
So, pay attention to where the company is being formed, and what that means to you, at the outset of your business relationship. The issue of where the company will operate does not necessarily determine all your rights. If the agreement was created years ago and cannot be changed now, ask an experienced shareholder dispute attorney what – and where - your rights are.
Please do not hesitate to reach out to me at dcroberts@norris-law.com.
About the Author – Business Divorce in NJ
David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.