Minority Shareholder Rights
Minority shareholders have significant rights in New Jersey, despite not controlling the direction of the company. The majority cannot engage in what the statute refers to as “oppression,” which broadly defined means that it cannot trample the rights of minority shareholders.
Shareholders who are not employed by the company in which they own stock, a situation most often found in family-owned companies, still have protection under New Jersey law. The most prevalent way such minority shareholders’ rights are disregarded is for them to receive no benefit whatsoever for their investment or stake in the company. When the majority shareholders work for the company, taking huge (or even not-so-huge) salaries and leaving nothing for shareholder dividends for their business partners, that may violate the rights of the minority shareholders. In essence, the majority in such a case is using the minority’s capital investment for themselves, while giving no benefit to the minority.
The purpose of this article is to discuss disputes or disagreements among or between shareholders of closely held corporations in New Jersey. Different principles of law apply to New Jersey partnerships and, to a certain extent, Limited Liability Companies. However, for the sake of conversational flow, the term “partner” or “business partner” is sometimes used, since that is a term commonly used by businesspeople to describe their relationship with the persons with whom they are in business, no matter the technical legal form.
Shareholders who do work for the company and are involved in management are usually oppressed or mistreated in a somewhat different manner. The majority shareholders may attempt to freeze a minority shareholder out of the company, referred to as a “squeeze out” or “freeze out.” The controlling shareholders may come right out and fire the minority shareholder/employee, remove him or her from the board, or simply make working conditions so bad in the hopes that the shareholder simply resigns as an employee. Depending on the circumstances, this may also be considered oppression or mistreatment giving rise to a potential cause of action.
What can a minority shareholder whose rights have been trampled do? Courts commonly order the majority shareholders to buy out the minority shareholder’s stock interest. In certain cases, under special circumstances, a court may order that the minority actually buy out the majority shareholders. Courts in New Jersey also may award damages and/or attorneys’ fees to a victorious minority shareholder, and may hold the oppressing shareholders personally liable for their conduct.
All too often, minority shareholders do not bring an action for being mistreated by the majority because they feel there is no value left in the company after their partners have “run the company into the ground.” However, if money or other assets have been improperly “sucked out” of the company by the majority, a court in New Jersey may order that the valuation be increased to compensate for this defalcation. There may also be other equitable reasons to increase the valuation of your shares, so it may very well be a mistake for a shareholder not to sue his partners simply because the company “has no money.”
If a shareholder dispute or disagreement arises and a minority shareholder feels he or she is being mistreated, or even defrauded, a lawsuit brought under the statute protecting minority shareholders may be necessary. At the very least, the lawsuit may be used to uncover the documents necessary to determine whether the remedies in the statute are available.
1. The purpose of this article is to discuss disputes or disagreements among or between shareholders of closely held corporations in New Jersey. Different principles of law apply to New Jersey partnerships and, to a certain extent, Limited Liability Companies. However, for the sake of conversational flow, the term “partner” or “business partner” is sometimes used, dsince that is a term commonly used by businesspeople to describe their relationship with the persons with whom they are in business, no matter the technical legal form.