Shareholder Oppression

At Lindabury, McCormick, Estabrook & Cooper, our litigation attorneys represent both minority and majority shareholders in shareholder oppression lawsuits. Minority shareholders of closely held corporations may become substantially dissatisfied with the majority's management. The majority can control the corporation over their objections, and there is no ready market for minority shareholders to sell their shares of the closely held company. Because of their particular vulnerability, minority shareholders are permitted to ask the court to dissolve a closely held corporation in cases of shareholder oppression. Our New Jersey shareholder oppression attorneys understand that this is not always warranted, however, and we can craft skillful arguments for parties seeking or resisting dissolution.

If a corporation has 25 shareholders or LESS, N.J.S.A. 14A:12-7(c) provides that any shareholder may sue to dissolve the corporation if directors or others in control have behaved illegally or fraudulently, mismanaged the business, abused their authority, or behaved oppressively or unfairly toward at least one shareholder in their capacity as shareholders, employees, officers, or directors. Majority shareholders in close corporations owe a fiduciary duty to the minority shareholders and must act with the utmost good faith and loyalty in corporate transactions.

Whether or not someone is a minority shareholder entitled to bring a shareholder oppression lawsuit requires the court to examine that shareholder's degree of control over the corporation. This is a fact-sensitive analysis of who has control over the corporation's affairs, rather than a question of who owns the most shares. For example, someone who owns a majority of shares may be considered an oppressed minority shareholder in a situation in which stock is held in a voting trust controlled by that other shareholder.

In New Jersey, shareholder oppression occurs when the majority's actions frustrate the reasonable expectations of a minority shareholder. These expectations may be both monetary and nonmonetary. For example, some minority shareholders expect continuing employment, and when they are terminated, the termination and freeze-out may be considered oppression. Similarly, the loss of stock value may be considered oppression in some circumstances. A minority shareholder who wishes to file suit should use his or her right to access corporate records to determine whether there has been mismanagement or waste of corporate assets.

Other shareholder acts that have been found to be oppressive include failing to pay dividends when the company is in a financial position to do so, providing excessive compensation to majority shareholders that is unfair to the minority, using corporate funds to pay majority shareholders' personal expenses, and trying to implement an unfair stock redemption plan that favors majority shareholders.

Majority shareholders may be able to defend a shareholder oppression lawsuit on various grounds, depending on the basis for the minority shareholder's suit. One defense may be that the minority shareholder acquiesced in the fraudulent or illegal corporate acts. If the lawsuit is based on a claim of mismanagement, the majority may be able to use the business judgment rule to justify its actions. However, the business judgment rule usually applies only when the parties are disinterested individuals, and this is rarely the case for majority shareholders of a closely held corporation.

The court has the authority to provide a remedy based on the facts at hand. If it finds oppression, it may appoint a provisional director or custodian to run the corporation until the dispute is resolved. It may also order the sale of the corporation's stock to the company or other shareholders or enter a judgment dissolving the corporation. Usually, dissolution is ordered only when the corporation has been severely mismanaged or has defrauded others. Often, the court orders the majority shareholders to buy out the minority shareholder.

Although most people go into business in a closely held corporation with the best of intentions, these business relationships are often also personal relationships, and they can easily go awry. Whether you are a minority or majority shareholder in an internal corporate dispute, you should retain counsel who understands the nuances of the law related to shareholder oppression. The New Jersey shareholder oppression lawyers at Lindabury, McCormick, Estabrook & Cooper provide diligent representation in bringing or defending against these claims. Call us at 908-233-6800 or contact us via our online form to set up a consultation with a litigation attorney.