Proving Oppression and Obtaining a Buyout is Not as Simple as “Cashing Out”
Many times, a client comes in after already reading as much as they can on the internet about shareholder dispute litigation and having already concluded that they are entitled to have their shares purchased by the majority shareholders. Often that is their goal – a buyout. But it is critical to keep in mind that the remedy of a buyout is not automatic. In New Jersey, a minority owner must first prove wrongdoing or oppression.
A commonly held, but mistaken, belief is that a minority owner can simply sue to be bought out because he does not want to be an owner anymore. Unless your governing document (shareholders agreement or operating agreement in an LLC) provides that right, you have to prove you were oppressed.
For example, in one case, the plaintiff assumed that, at trial, the company (my client) would agree to a buyout simply because we spent the entire litigation discussing a buyout as a remedy to settle the case. When the trial came around, the plaintiff was shocked to discover that my client intended to win the case, prove there was no oppression, pay not one penny, and live with a disgruntled minority owner. While it is not ideal to remain business partners with someone who just sued you, albeit unsuccessfully, it is often better than the alternative of paying a price you either think is too high, cannot afford, or simply do not want to pay.
It is also important to realize that a buyout is not an automatic remedy even when oppression is found to exist. For example, if the worst example of oppression is the failure to provide financial information, the court can simply order that financial information be provided in the future, and on a timely basis. Or, if the only complaint is the failure to make distributions, the court can order those distributions to be made under certain financial parameters.
The point is that these cases are not simply instances of a minority owner deciding to “cash out” and fighting about the size of the check to be written. Each case is distinct, each has its own set of facts, and each has its own likely resolution. Sometimes a buyout is inevitable, and sometimes such a remedy is an uphill battle.
If you have read articles that make it seem as if you can simply sue to be bought out, be aware there is much more to it than that. To learn more about the intricacies of shareholder disputes and litigation, please feel free to reach out to me at email@example.com.