by Scott Unger Esq.
Minority oppression describes the activities often employed by majority shareholders or members in closely held companies in an effect to squeeze out the minority shareholder or member. Forms of oppressive conduct include but are not limited to: terminating the shareholder or member’s employment; taking excessive compensation; withholding compensation, distributions and/or bonuses; verbal abuse; physical abuse; usurping corporate opportunities; creating competitive businesses; and stealing.
Both the New Jersey legislature and the Courts interpreting New Jersey’s minority oppression statute have been on the cutting edge of protecting the rights of minority shareholders. Unlike Delaware, the New Jersey legislature enacted a minority oppression statute to protect minority shareholders. N.J.S.A. 14A:12-7. The New Jersey Supreme Court applied the more protective “reasonable expectations of the shareholder test” when determining whether or not a minority shareholder was oppressed. Brenner v. Berkowitz, 134 N.J. 488, 506 (1993). Some states, like Ohio, apply a more rigid approach in defining what constitutes minority oppression. See, Crosby v. Beam, 47 Ohio St. 3d 105, 109 (1989). Ohio applies a more objective test, while New Jersey applies a more subjective test – considering how the shareholders were historically treated.
New Jersey is also favorable to the oppressed, if they are bought out. Courts have a number of options when addressing oppressive conduct. They may remedy the oppression in the following ways: by ordering one party or the other to cease and desist from engaging in the oppressive conduct, by ordering one side to sell their interest in the company to the other, by ordering that the business be liquidated, or by dividing the business. Typically, the remedy employed by Courts in an oppression case is to have one side buy the other out. An important issue when determining the buyout price is the applicability of “discounts.” Unlike states like Pennsylvania, Delaware and Ohio, New Jersey does not apply discounts (minority or lack of marketability) unless equity determines otherwise. Lawson Mardon Weaton, Inc. v. Smith, 160 N.J. 383 (1999); Balsamides v. Perle, 160 N.J. 352 (1999).
In the mid- to late 1990s, business owners were afforded another form of corporate entity: the limited liability company. For many reasons, business owners forming companies since then have elected to form their company or change their corporation to a limited liability company.
Unbeknownst to minority members of limited liability companies, they were not afforded the same protections as minority shareholders in corporations because, until recently, the minority shareholder statute N.J.S.A. 14A:12-7 did not apply to limited liability companies. Hence, oppressed members of a closely held New Jersey Corporation could only rely upon common law causes of action such as breach of fiduciary duty to combat oppressive conduct.
Recently, the New Jersey legislature enacted the New Jersey Revised Uniform Liability Act. N.J.S.A. 42:2C-1, et. seq. The Act currently applies to all New Jersey limited liability companies formed before and after its enactment. It provides the same protections afforded to minority shareholders to minority members of a limited liability company. Now, a minority member of an limited liability company may assert claims if the majority members have acted fraudulently, oppressively or interfered with the reasonable expectations of the minority member. N.J.S.A. 42:2C-48(a)(5)(a)-(b).
The enactment of the New Jersey Revised Uniform Liability Act is the latest confirmation that New Jersey will not permit oppressive conduct.
For further information about Minority Oppression contact Scott Unger at Stark & Stark at 609-896-9060 or by e-mail to firstname.lastname@example.org.