How “Oppressed” Shareholders Can Assert Their Rights in Small Businesses

stormtroopersIn closely held businesses, minority shareholders—generally meaning shareholders with less than 50 percent of the company’s voting shares—can easily find themselves at a disadvantage in disputes with majority shareholders. New Jersey’s Oppressed Shareholder Statute (OSS), N.J. Rev. Stat. § 14A:12-7 et seq., provides shareholders with a means to assert their rights when they suffer from bad-faith actions by other shareholders. They do not necessarily have to be in the minority to qualify as oppressed shareholders under the OSS, according to New Jersey courts. A recent decision illustrates how shareholders can benefit from this statute. RP v. SP, No. UNN-C-108-13, mem. op. (N.J. Super. Ct. Chanc. Div., Dec. 22, 2016).

Avoiding conflicts that lead to litigation is obviously the goal of any business owner. Still, it is useful to know which options are available should a company’s operating agreement fail to provide an adequate means for dealing with conflict. The OSS authorizes courts to intervene in a business for various reasons, with remedies ranging from the appointment of a custodian or provisional director to the dissolution of the business entity. If a corporation has no more than 25 shareholders, the OSS allows court intervention if “the directors or those in control…have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.” N.J. Rev. Stat. § 14A:12-7(1)(c).

“Control,” in this context, refers to control of the corporation’s voting stock. A “minority shareholder” can include not only a shareholder with a minority of shares but also one who “does not have control of the corporate shares with respect to voting rights.” Berger v. Berger, 249 N.J. Super. 305, 317 (1991). A minority shareholder, under this definition, can also be an “oppressed shareholder” under the OSS, regardless of whether they actually own a minority of shares. Balsamides v. Perle, 313 N.J. Super. 7, 16 (1998).

RP v. SP involved two brothers and two closely held businesses. Each brother held a 50 percent interest in each business, and each served as president of a business. According to the plaintiff, the business operated by the defendant consistently lost money at the rate of about $348,000 per year for 20 years, but much more in the five years prior to the lawsuit. He further alleged that the defendant took money from the plaintiff’s business to cover the losses. He filed suit for OSS violations, breach of contract, and breaches of various express and implied covenants. The defendant countersued for many of the same causes of action.

The court ruled in the plaintiff’s favor, finding that the defendant had oppressed the plaintiff. This determination, the court noted, required it to “examine the parties’ understanding in respect of their roles in corporate affairs.” RP, mem. op. at 11. It based its ruling largely on “[t]he loss of $500,000 a year…for the last 5 years and the fact that money to cover the loss would be withdrawn at [the defendant’s] direction…without [the plaintiff’s] consent.” Id. The court’s order gave the plaintiff the right to buy out the defendant’s 50 percent interest in his company at a discounted rate.

Samuel C. Berger, a business attorney practicing in New York and Northern New Jersey, offers fixed-fee packages of legal services covering a wide range of legal needs for entrepreneurs, businesses, and business owners. Contact us online, at (201) 587-1500, or at (212) 380-8117 today to schedule a confidential consultation to see how we can assist you and your business.

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New York Court of Appeals Applies “Business Judgment Rule” in Shareholder Suit Against Corporation, New York & New Jersey Business Lawyer Blog, July 7, 2016

Federal Appellate Court Pierces Corporate Veil, Holds Shareholder Liable for Customs Violations, New York & New Jersey Business Lawyer Blog, October 23, 2014

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