The New Jersey Shareholders Protection Act (the “Act”) enumerated laws that protect minority shareholders in closely held corporations from “oppression” by the majority shareholders. The Act provides that, in cases of corporations having 25 or less shareholders, a court may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock or enter a judgment dissolving the corporation upon proof that the directors or those in control 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. N.J.S.A. §14A:12-7(1)(c). If used properly, the Act may provide relief to a shareholder who is unhappy with a corporation’s management.
Who are Minority Shareholders?
Whether a particular shareholder is a “minority” does not depend solely on the number of shares owned, but rather by a qualitative evaluation of the actual control a particular shareholder may exert on a closely held corporation. Bonavita v. Corbo, 300 N.J. Super. 179 (Ch. Div. 1996). The policy behind N.J.S.A. §14A:12-7(1)(c) focuses on relative power and the ability of one side to oppress another, rather than on numbers or percentages of stock ownership which, in any given case, may be an insignificant factor. Id. It is clear that the legislature intended the Act to protect any shareholder, regardless of their percentage of ownership, as long as the shareholder is being oppressed.
What is Oppression?
Shareholder oppression is determined by examining the reasonable expectations of the complaining shareholder and the effect of the defendant’s actions on those expectations. See Brenner v. Berkowitz, 134 N.J. 488, 509 (1993); Bonavita v. Corbo, 300 N.J. Super. 179, 194 (Ch. Div. 1996). Oppression is found where the defendant’s behavior frustrates the plaintiff shareholders’ reasonable expectations. Brenner, 134 N.J. at 506 (“Oppression has been defined as frustrating a shareholder’s reasonable expectations”). Ordinarily, oppression by shareholders is clearly shown when they have awarded themselves excessive compensation, furnished inadequate dividends, or misapplied and wasted corporate funds. Muellenberg v. Bikon Corp., 143 N.J. 168, 179 (1996). In the case of small business organized as corporations, generally, shareholders may not intentionally waste corporate assets or devalue the corporation. This is true whether or not the oppressing shareholder holds the title of director, president, vice president or other corporate officer.
What are the Remedies for Oppression Under the Act?
The Act provides that in the event of shareholder oppression, a court may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock or enter a judgment dissolving the corporation. Typically, the oppressed shareholder will file verified complaint seeking temporary restraints or a preliminary injunction against the offending shareholder and the corporation itself. The Interlocutory appointment of a custodian or provisional director assures proper oversight and management of the corporation while the shareholders resolve the issues of the suit. In other cases, the oppressed shareholder may demand the corporation purchase his or her shares for fair market value. Lastly, in extreme circumstances, the corporation may be dissolved to prevent further oppression by the majority.
What to Do If You Think You are an Oppressed Shareholder
Many small businesses organized in the form of a corporation are owned by less than 25 shareholders with a select few of those shareholders controlling the management and assets of the corporation. The minority shareholders are protected from the arbitrary actions of the majority that frustrate the minority shareholders expectations. If you think you are an oppressed shareholder, it is advised that you consult an attorney prior to taking any legal action. If you are considering taking legal action to protect your shareholder rights, please contact our offices for a consultation.