New Jersey’s corporate management structure is similar to that found in most states. Generally, New Jersey corporations are managed by a board of directors, who are elected by the shareholders. The directors stand in a fiduciary relationship to the corporation and must perform their duties in good faith. The board of directors of the corporation elect officers to handle the day-to-day affairs of the corporation.
 

Partnerships
General partnerships and limited partnerships enjoy “flow-through” tax treatment for tax purposes; the entity is not taxed and the partners report profits and losses directly on their personal income tax returns. Unless an agreement between the partners provides otherwise, each partner is entitled to share equally in the management of the partnership and has the authority to bind the partnership.  The drawback of the general partnership is lack of limited liability protection. In contrast to a general partnership, limited partners in a limited partnership do not participate in the management of the partnership. A limited partnership must have at least one general partner and at least one limited partner. The general partner assumes personal liability for the debts and obligations of the partnership. The limited partners do not have any personal liability beyond the capital contributions they contribute to the partnership.
 

Limited Liability Companies
Like general partnerships and limited partnerships, limited liability companies’ (“LLCs”) profits and losses “pass through” the entity and are reflected and taxed on the individual tax returns of the members. LLCs can be managed by the members or one or more elected managers. The default rule in New Jersey is that the members manage the LLC. In this scenario, each member has the authority to bind the LLC.  If the members opt to have the LLC managed by a board of managers, the members may appoint one or more managers to operate and control the business. In this instance, each manager is vested with the authority to bind the LLC.
 

Unlike a limited partnership, there is no requirement that at least one member of the LLC be responsible for the liabilities of the company. Furthermore, members are not liable for the debts of the LLC solely because they are members. Because of the ease of formation and its favorable liability treatment, the LLC has become increasingly popular in New Jersey.

The workshop will focus on issues affecting not-for-profit organizations or institutions and will cover topics under both federal law as well as New Jersey state law. The topics that will be discussed will include: organizational structure and the kinds of activities in which an organization may (and may not) engage; the taxability of unrelated business income; tax exempt qualification and activities that may jeopardize such qualification; record keeping requirements; filing requirements, including a discussion of the yearly 990 filing; required corporate formalities; criminal law issues including money laundering, tax evasion/tax avoidance, benefits fraud and the “know your customer” requirement; required filing of forms for cash deposits and suspicious activities; and banking & licensing requirements including activities that may require an organization to be licensed as a bank, money service business, money transmitter, and check casher.

For additional information contact the Agudath Israel of New Jersey at ykupfer@agudathisrael.org or call 212-797-9000 ext. 306.

Retrofitness franchises have been steadily increasing in number over the last few years.  Back in November 2005, Retrofitness entered into a license agreement with Model A’s owners for the development of a facility in Boonton, but Model A alleges in its Complaint filed in New Jersey Superior Court that Retrofitness’ principal, Eric Casaburi, enticed them into the license agreement through a series of false promises and misrepresentations, and then attempted to coerce them into signing a franchise agreement on far less favorable terms for the owners.  When the owners refused, Retrofitness terminated the license agreement and, according to the Complaint, opened a new location up the street which unfairly competed with Model A. 

The case is being watched because it raises significant issues under the Franchise Practices Act, and also because it will test the applicability of New Jersey’s Consumer Fraud Act generally to franchises.  The Complaint filed in New Jersey Superior Court can be viewed online here.

The article discusses the differences, and advantages, between an S Corporation and a C Corporation. Mr. Sigelheim points out that although S Corporations currently receive tax breaks which were put in place by former President Bush, President Obama’s proposed budget for 2011 does not include the renewal of these tax cuts, and therefore, in the future it may be more profitable to operate as a C Corporation. 

You can read the full article online here.

The seminar will discuss the legal implications, benefits and detriments of buying an existing business, buying a franchise, and starting a business from scratch.  Mr. Kvitka will also address the issues which commonly arise with new businesses, including how to structure the transactions, due diligence, intellectual property issues and how to negotiate a commercial lease.

 
To register for the seminar, contact SCORE at: info@scoreprinceton.org, or by phone at 609-393-0505.

The seminar will discuss the pros and cons of three business startup options:  buying an existing business, purchasing a franchise, or building your own business.  It will also cover how to negotiate commercial leases and vendor contracts for maximum protection. 

To register for any of these seminars, send an email to info@scoreprinceton.org, or call SCORE at 609-393-0505.

1. You recently wrote a scholarly article for a trade journal, and shortly after it was published discovered that a substantially similar article appeared in another journal.  Unfortunately, you never registered the work with the U.S. Copyright Office, nor did you put any copyright notice on the article.  Do you have any rights?

Yes.  Under the Copyright Act of 1909, copyright owners forfeited their rights when they failed to mark each copy of their work with a proper copyright notice (name, date and copyright symbol).  Under the 1976 and 1988 amendments to the statute, however, the formalities of the earlier law have been all but eliminated.  Now, for all works first published after March 1, 1989, no copyright notice is required to secure protection for the author (although it is still recommended and used widely).  Moreover, contrary to popular myth, registration affects only the enforceability, not the existence, of copyright.  Copyright arises upon creation of the work, and registration merely gives the author certain additional rights, such as the right to sue to enforce the copyright and the right to claim enhanced damages.

2.    You discover that someone first copied and sold your computer program ten years ago, and is continuing to infringe the work to this day.  Can you pursue such a claim even though it is so old? 
Yes.  Although the Copyright Act contains a three-year statute of limitations, most courts hold that either:

1) the statute does not begin to run until the date of the last act of infringement; or

2) the statute permits recovery of all damages occurring within the three-year period preceding suit, even if some acts of infringement occurred beyond that period. Therefore, you can probably still pursue much of the claim.

3. You are the owner of an advertising agency, and your creative director tells you that she had no idea that employees were making unauthorized use of copyrighted material for the benefit of the agency.  Is this a defense?
No. Innocent intent, good faith, or even subconscious copying are not defenses to copyright infringement.  Although it may have a great bearing on the issue of whether the infringement was willful (subjecting the company to enhanced damages), the copyright owner only needs to prove that unlawful copying occurred.  The company itself may be liable if it provided the means for its employees to commit the infringement, and had or should have had knowledge of the infringing activity (known under the law as “contributory” infringement), or if it had the right to control the employee's conduct and received a financial benefit from the infringement (known as “vicarious” infringement).
 

4. You have a great idea you want to copyright, and it involves a new system for processing customer orders.  You have written down your ideas in a concise document.  Will a copyright registration protect this idea?
 Probably Not. Unlike patents, copyrights do not protect ideas, only the expression of those ideas.  Moreover, the rights granted by Congress to copyright holders in the Copyright Act are not unlimited.  The statute grants a copyright holder certain exclusive rights, including:

1) the right to reproduce;

2) the right to prepare derivative works;

3) the right of public distribution;

4) the right of public performance; and

5) the right of public display. 

The Act does not give the owner a monopoly on the ideas embodied in the work, and in fact the statute is explicit in stating that "[i]n no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery...."  This is the famous "idea/expression" dichotomy of copyright law.   Therefore, even if you file a registration, the scope of protection may be quite limited. 

(c) Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.
 

Whenever the purchaser, transferee or assignee shall fail to give notice to the director as required by the preceding paragraph, or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, in addition to being subject to the liabilities and remedies imposed under the provisions of the uniform commercial code, Title 12A of the Revised Statutes of New Jersey, shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act."
 

In 1995, I co-wrote an article with my former colleague, Susan Inverso, entitled "What Secured Lenders Need to Know About Notice Requirements and Tax Liabilities Before Repossessing Personal Property"   This topic is becoming more relevant today, as more lenders are repossessing property and taxing authorities trying to make up shortfalls in State budgets by action to collect delinquent taxes.
 

The State of New Jersey has made clear that they intend that statute to apply not only to transfers of personal property, but also to real estate if the real estate is the principal asset of the seller. 
 

The statute also applies to any transfer, regardless of the dollar amount.  This means that even if the transfer is for no consideration, the buyer or transferee must comply with the bulk sale notification procedures.  If the seller owes taxes, either the seller or buyer must come up with the escrow amounts.  Otherwise, the buyer will be liable for the seller's state tax obligations. 
 

Before accepting the transfer of any property outside of the ordinary course of business, you should confirm that all requirements, such as the New Jersey Bulk Sale Transfer Notice requirements, are met, so that no unforeseen liabilities result from the transfer.

Unfortunately, unlike publicly traded companies which have disclosure and reporting requirements pursuant to federal securities laws, shareholders in a closely held corporation do not have such broad disclosure requirements. Nevertheless, state courts have recognized that a person who owns shares in a closely held company is a part owner of that company who is entitled for participation of their interest, to information about the company.  The problem is Courts differ on what shareholders are entitled to receive under their state’s laws and what obligations corporate managers have affirmatively to supply information.
 

The New Jersey legislature granted shareholders a statutory right to inspect the corporation’s books and financial records. N.J.S.A. 14A:5-28.  It is well settled law in New Jersey that a shareholder has the right to inspect the books and records of the corporation if “he is acting in good faith and for some purpose germane to his status or interest as a shareholder.”  Pilat v. Broach Systems, 108 N.J. Super. 88, 94 (Law Div. 1969).   Hence, unless bad faith is shown, New Jersey Courts will order the production of financial records.

The New Jersey legislature has responded to the concerns of New Jersey minority shareholders by enacting the “Oppressed Minority Shareholder Statute” (N.J.S.A.14A:12-7). The Oppressed Minority Shareholder Statute was enacted to protect minority shareholders against shareholders, directors and officers of closely held corporations that have (i) acted fraudulently or illegally, (ii) mismanaged the corporation, (iii) abused their authority as directors or officers, or (iv) acted oppressively or unfairly toward one or more minority shareholders. The statute, coupled with a series of cases decided by New Jersey courts over the course of the past twenty-five years interpreting the “Oppressed Minority Shareholder” statute, have afforded minority shareholders in closely held corporations, with twenty-five or fewer shareholders, substantial protection against oppressive conduct. Interestingly enough, the percentage of stock that a shareholder owns does not necessarily determine whether or not a shareholder is considered a minority shareholder. In one decision, the court found that the plaintiff (a 98% shareholder of the subject corporation) was an oppressed minority shareholder. In that case, the stock was held in a voting trust which was controlled by the owner’s father and the shareholder had no control over the stock. Since that decision, courts  have interpreted the meaning of “minority shareholder” loosely, allowing any shareholder to claim protection under the statute if the shareholder can prove, irrespective of the percentage of stock he/she owns, that he/she lacks sufficient control over the affairs of the corporation and is being oppressed by those shareholders in control.

If a minority shareholder has concerns of oppression, said shareholder has recourse by commencing litigation against the majority shareholders under N.J.S.A.14A:12-7. In the event that litigation is initiated, a court will fashion a remedy that it deems most appropriate, given the facts of the case. If oppression is found to exist, one of the most common remedies is to appoint a custodian or provisional director to run the corporation’s daily affairs until the shareholder disputes are resolved, ordering a sale of the corporation’s stock, or entering judgment to dissolve the corporation. A judgment dissolving a corporation is a very drastic remedy and will only be ordered by the court if the court finds that the corporation has been irreparably harmed. Another common remedy that a court will utilize in resolving shareholder oppression claims is to order a buy out of the stock of one or more of the shareholders involved. The usual scenario is for the court to order the majority shareholders to buy out the minority shareholder’s stock interest in the corporation. However, in special circumstances, courts have ordered the minority shareholder to buy out the majority shareholders’ stock interest.

In the instance of a buy out, a critical element of the court’s decision will be the value of the selling shareholder’s interest.  In such cases, a shareholder agreement may establish the value or a court may determine the value of the interest. It is important to understand that there are various ways of valuing an interest in a corporation. In some instances the court may apply a “fair value” standard. “Fair value” is intended to fairly compensate the shareholder and may differ from a stock’s “fair market value,” as consideration is given to the fact that an impartial buyer may not be willing to buy a small stake in a closely held corporation. In appropriate circumstances, a court may also apply “marketability” and/or “minority interest” discounts to the valuation of the stock. Marketability discounts are applied to reflect the fact that there is only a small pool of potential buyers, if any, for the stock held by the minority shareholder and finding a market for the sale of the stock to an outside buyer would be difficult. Minority interest discounts may be applied when it is determined that any outside purchaser will also lack control over the corporation, so the “minority interest discount” will reflect a downward adjustment to the value of the minority shares.

A shareholder in a closely held corporation would be wise to remember that if “frozen out” of corporate decisions, shareholders may have significant rights under New Jersey law. A shareholder should continuously document the acts of the majority shareholders that he/she disapproves of, because acquiescence in inappropriate corporate acts can be used as a defense by the majority shareholders should litigation ensue. Furthermore, if a shareholder feels that the majority shareholders are mismanaging the corporation, he/she should exercise his or her statutory right to access the records of the corporation to determine if the majority shareholders are mismanaging the corporation and wasting corporate assets. In the event that a review of the corporate records proves that the majority shareholders have mismanaged the corporation, subjecting the minority shareholder to oppression and a resulting loss of stock value, he/she should seek legal counsel and protection under the “Oppressed Minority Shareholder” statute.

1. the employee’s qualifications and abilities;
2. the qualities and quantity of services rendered for the benefit of the corporation;
3. the amount of time the employee devotes to the corporation;
4. the difficulties involved and responsibilities assumed;
5. the successes achieved by the individual;
6. the profits resulting to the corporation from the employee’s direct and indirect contributions;
7. the size and complexity of the business;
8. the number of people the employee is charged with training, mentoring and/or supervising;
9. the corporation’s financial conditions;
10. the prevailing economic conditions;
11. the compensation over the past few years (also considering factors which could have effected previous year’s compensation);
12. a comparison the compensation of other company employees; and
13. a comparison to others who work in similar companies.

 There are a number of remedies available to the Court if it were find that the compensation is excessive. One available remedy is requiring the repayment of what the Court determines to be excessive. Another remedy is the issuance of an injunction preventing future siphoning off of corporate funds and resources. A third available remedy is the appointment of a receiver or corporate director charged with running the day to day affairs of the company. The most often employed Court remedy is a Court Ordered buy-out of the minority interests. Of course, Court will often factor the additional value of the corporation had the majority shareholder taken reasonable compensation.

Generally, “oppression has been defined as frustrating a shareholder’s reasonable expectations.”  Brenner v. Berkowitz, 134 N.J. 488, 506 (1993) (citing, 2 O’Neil’s Close Corporations § 9.29 at 132 (Callaghan & Co., 3rd ed. 1988)).  The following situations could constitute actionable unlawful “oppression” where the majority:

1. has cut off the flow of income to the minority owner by refusing to declare dividends;
2. terminated the employment of the minority or their family members;
3. removed the minority from the board of directors;
4. decided to award themselves (or their family members) exorbitant salaries and/or bonuses;
5. diverted corporate assets to other corporations which are owned by the majority and not the minority;
6. siphoned off corporate assets by entering into leases or loans with terms favorable to the majority while at the same time detrimental to the minority;
7. refused to enforce contracts that are beneficial to the corporation because the enforcement of those contracts would be personally detrimental to the majority;
8. withheld company information;
9. embezzled company assets; and/or
10. acted fraudulently towards the corporation, which, in turn affects the minority shareholder.

   
In blog articles to follow, I will go into greater detail as to the majority’s use of the afore-described squeeze-out techniques along with how a minority shareholder may employ the law to fight back.

Fortunately, New Jersey, unlike other states, provides protections for oppressed minority shareholders.  N.J.S.A. 14A:12-7(c).  When the New Jersey Legislature enacted those protections, it recognized that the size and nature of closely held companies, coupled with the fact the relationships tend to be more intimate and intense than in a larger corporate environment could lead to oppression.
 

The purpose of this brief article is to discuss some of the causes of oppressive conduct  and to make recommendations which will hopefully prevent them. Another purpose is to provide those who have been oppressed, or the subject of an unlawful squeeze-out, with the understanding that you are not alone.  Under New Jersey law, you have recourse if you are the victim of oppressive conduct.
 

I. Greed

As might be expected, many squeeze-outs are caused largely to avarice of individuals who see and seize opportunities to enlarge their power and influence and increase their wealth.  Frequently, an unchecked greedy shareholder will seek power and wealth at the expense of others. Because closely held corporations are generally run by “majority rule,” the majority shareholder could take advantage of their majority position.
 

In addition, a shareholder who holds a position of power within a corporation and runs the business like a one-person autocratic manner may cause unrest amongst the shareholders. Obviously, it is inappropriate for an individual to run a business as a one-person show where others are owners.  The autocratic leader may ignore or simply disregard the input or opinions of the other shareholders leading to conflict.

Obviously, the commencement of litigation could aid the minority shareholder in fighting back the oppressive conduct of a greedy or autocratic shareholder. So as to avoid costly litigation, it is always prudent to create corporate rules at the time the corporation is created. This will protect the shareholders from a “greedy” or autocratic party.  It is also prudent for the shareholders to take necessary steps to maintain their relationships during the course of their association with the corporation and the other owners.
 

II. Personality Clashes & Family Quarrels.

Many times conflicts between the shareholders are caused by changes in personal relationships amongst them. Oppression often occurs as a result of a change that disrupts a relationship or triggers a family dispute.
 

1.  Divorce. Divorce frequently causes minority oppression. Because of the size and nature of closely held companies,  business and family relationships often overlap. Family dysfunction can manifest itself in oppressive conduct.  For example, the spouse of a family member who was taken into a family owned closely-held company may get squeezed out once the marriage fails. Moreover, where ownership in a business is one of the assets that has been divided in a divorce setting, a former spouse who as received a minority interest may face oppressive conduct by the former spouse or the business associates of the former spouse who do not welcome the new owner in their midst. Obviously, you should discuss these issues with your matrimonial attorney at the inception of that relationship.  Those important discussions need to continue with your matrimonial attorney throughout the course of the representation. In addition, it is important to carefully chose a matrimonial attorney or law firm who has experience with these delicate and important issues.  My firm, Stark & Stark has professionals who possess the experience necessary to aid you if you are confronted with these issues.
2. Personal Clashes. Personal clashes often cause minority oppression. Changes in personal relationships caused by misunderstandings, “growing apart,” differences in work ethics and opinions have lead to strife amongst the shareholders. Like marriage, the relationships amongst shareholders require  “work.”  It is unrealistic to expect that shareholders will agree on every decision. The key to avoiding major discord amongst the shareholders which may lead to litigation is to work with one another and to listen to the other’s point of view.  The same strategies employed by a good marriage may help avoid shareholder disputes.

III. The Aging or Ill Shareholder.

An aging or ill shareholder may produce other circumstances conducive to dissension.  For example, a shareholder with diminished mental capacities caused by disease or advanced age may be taken advantage of by one of the other shareholders. Moreover, the diminished owner’s weakness and gullibility may be seized upon and utilized to squeeze-out a third-party.

In addition, oppressive conduct may be caused by an aging shareholder who refuses to relinquish control. Like the “greedy” shareholder, an aging founder who is accustomed to running the company the way they wish may regard the corporation as their own property. Sometimes as that person ages they may become more tyrannical.  That, of course, could lead to discontent.

   

To avoid problems caused by the aging or ill shareholder, I recommend that the shareholders discuss and create clear-cut retirement rules, disability and deferred compensation arrangements, which are put into place when the founder and all shareholders are healthy. I also recommend to avoid litigation with the aging or ill shareholder’s family that they know and understand the established rules well before their relative is confronted with diminished capacities.  If there are any questions related to the capacity of the aging shareholder at the time these plans are put into place, it is probably prudent to seek a qualified health care professional who could provide an opinion as to the competency of the elderly or sick shareholder if it is ever questioned.
 

IV. Death Of A Shareholder.

The death of a founder of a business or of a principal shareholder may produce problems which may lead to oppression.  Sometimes, the successor shareholder may want to actively participate while the others may not be willing for  him to join. As discussed above, personality clashes may present the new shareholder and the other participants from working together harmoniously.

   

Whenever a shareholder dies, the decedent’s block of shares may be divided amongst several people, which enhances the chances of an incompatible shareholder acquiring an interest in the company.  The unequal division of a majority shareholder’s stock between the testator’s children may serve as a catalyst for dissension, especially where the terms where unknown prior to the decedent’s death.  

   

To prevent dissension caused by the death of a shareholder it is wise to consider and implement a succession plan.  Often with the aid of a competent attorney like my partners, Rachel Stark, Esquire, Allen M. Silk, Esquire and Henry Van Blunk, Esquire who posses the training and experience in secession planning and may devise tax-friendly plans which can avoid turmoil in the event a shareholder passes.

   

Even if the shares are not divided, the death of a corporate leader could lead to oppression. A new person making decisions in place of the decedent could change the dynamic amongst the other shareholders.  In other words, the death of a shareholder could lead to a “greedy” leader taking control or personal clashes which could effect the dynamics amongst the surviving shareholders. Thus, I recommend that the shareholders discuss who and how the company should be lead if a shareholder were to die.
 

V. Financial Reversals, Personal Vices & Tough Economic Times.
 

Financial reversals and tough economic times often exacerbate problems that otherwise might not have arisen to provoking a squeeze-out.  Tough economic times, like the current recession often lead to discontent amongst the shareholders. Sometimes financial reversals and tough economic times result in a “greedy” shareholder taking more (either openly or by embezzling) than they should to support the lifestyle they established during better economic times. 

   

In addition, personal problems such as gambling, drug and alcohol addiction could lead to corporate dissension.  Addiction often causes problems within the workplace. Reduced effort generally results in decreased profits along with increased tensions amongst the shareholders.  Like tough financial times, addiction problems could result in embezzlement of corporate funds.
 
   

To avoid litigation and conflict, shareholders must be realistic and fair with one another. In addition, companies should establish protocols for addressing personal vices that if left untreated or unchecked could negatively affect the company and its shareholders.
 

VI. Undercapitalization of The Business.
 

In many instances, the undercapitalization of the corporate enterprise produce circumstances conducive to dissension.  Like financial reversals and tough economic times, the undercapitalization of a business could lead to tremendous problems. At the inception of the corporation, the shareholders need to consider how they intend on dealing with the possible need for additional capital and memorialize those agreements in writing.

   

In addition, shareholders sometimes try to characterize capital contributions as “shareholder loans” and seek re-payment of those “loans” during difficult times. The shareholders need to discuss and memorialize agreements when loans may and may not be repaid. Since undercapitalization could lead to discontent amongst the shareholders and other associated problems it is not wise to allow repayment unless the corporation is in a place financially when it may do so.
 

CONCLUSION
   
Minority oppression causes catastrophic damages to the squeezed-out shareholder and the corporation itself. Understanding and discussing the causes of oppression is important at the inception of the corporation and during the course of the shareholders’ relationships, so as to enact strategies to avoid it.

   

New Jersey law affords oppressed minority shareholder of a closely held corporation with a plethora of rights.  If you are an oppressed minority shareholder, you should speak with an attorney who is experienced representing those who were similarly situated.