Oppressed Shareholders

Corporations Law, or simply “Corporate Law”, refers to the laws, rules, and regulations that govern the formation and operations of corporations. Laws that govern the formation and operation of corporations are highly complex and technical, but generally, a corporation is a legal entity created under the laws of the State in which it is incorporated, designed to install certain benefits upon the creators of the corporation. Corporate law in the State of New Jersey is governed by the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 et al.

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Can I Sue For Shoreholder Oppression?

A closely-held corporation is a corporation owned and controlled by a small group of owners or shareholders. Often, shareholders in a closely-held corporation will elect themselves or family to serve as officers and directors. In the case of a closely-held corporation, valuation is particularly difficult because the corporation’s stock is not available on the public market. Because there is no readily available market for minority shareholders to sell their shares of the closely held company, a minority shareholder’s interest in the corporation isn’t protected by the market. Because of this vulnerability, minority shareholders are permitted to seek monetary or equitable relief with a court of law in cases of shareholder oppression, including, but not limited to, the dissolution of a closely held corporation.

Pursuant to N.J.S.A. 14A:12-7(1)(c), a shareholder in a closely held corporation may seek judicial intervention if the corporation has 25 or less shareholders and directors or other persons in control of the corporation have “acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors or have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.”

Shareholder oppression has been defined by New Jersey courts “to include that which frustrates the reasonable expectations of the minority shareholder.” Muellenburg v. Bikon Corp., 143 N.J. 168, 179 (1996). A long-recognized example of such frustration is a “shareholder freeze out,” which has been defined as

a manipulative use of corporate control or inside information to eliminate minority shareholders from the enterprise, or to reduce their voting power or claims on corporate earnings and assets or otherwise to deprive them of corporate income or advantages to which they are entitled.
Exadaktilos v. Cinnaminson Realty Co., 167 N.J. Super. 141, 152–53 (Law Div. 1979) (quoting 2 O’Neal, Close Corporations (2d ed. 1971), § 8.07 at 43), aff’d o.b., 173 N.J. Super. 559 (App. Div.), certif. den., 85 N.J. 112 (1980).

The duties of a controlling shareholder and director of a corporation are well-established under New Jersey law. The law imposes a “fiduciary duty upon the majority requiring it to act with utmost good faith and loyalty in transacting corporate affairs.'” Bostock v. High Tech Elevator Indus., Inc.,260 N.J. Super. 432, 444 (quoting Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984)). A corporate director’s duty of loyalty requires, among other things, that the director act in good faith on behalf of the corporation, rather than in his or her personal interests. See, e.g., Scheidt v. DRS Techs., Inc., 424 N.J. Super. 188, 200–01 (App. Div. 2012).

How Does NJ Evaluate Shareholder Oppression Lawsuits?

Whether an individual claiming an interest in a corporate entity is entitled to bring a shareholder oppression lawsuit requires an examination of the shareholder’s degree of control over the corporation. When evaluating a claim under the oppression statute, the specific ownership shares owned by the parties is irrelevant. The focus of the statute “is protection from the abusive exercise of power.” Bonavita v. Corbo, 300 N.J. Super. 179, 187 (Ch. Div. 1996). As a result, “the question of whether one is a minority shareholder should not ‘be determined through a mechanistic count of stock ownership percentages . . . [but rather] by a qualitative evaluation of the actual control a particular shareholder may exert on a closely held corporation.'” Id. at 18. This is a fact-sensitive analysis.

New Jersey courts adjudicating shareholder disputes have substantial authority under the New Jersey Business Corporations Act to fashion an equitable remedy based upon the facts of a particular case. If oppression or dysfunction is found, the Court may, in its discretion, appoint a provisional director or custodian to run the corporation until the dispute is resolved. The Court may also order the sale of the corporation’s stock to the company or other shareholders, enter a judgment dissolving the corporation, or enter an Order requiring an independent sale of the company in the open market. Due to various remedies a Court can impose in the context of shareholder dispute, a minority shareholder who feels their interest in the corporation is not being adequately protected, or that those in control have acted oppressively or unfairly toward them, should consult with an attorney to determine the appropriate course of action in any given case.

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