New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

Thomas B. Lewis, Chair of Stark & Stark's Employment group, was quoted in the June 5, 2009 article on Law360.com entitled, Securities Sales Not Subject To Fraud Act: NJ Court. The article discuss the recent New Jersey Supreme Court ruling which states that a broker accused of failing to properly transfer funds for the purchase of securities and the firm that employed the broker can't be held liable under the New Jersey Consumer Fraud Act.

Mr. Lewis states that applying to the New Jersey Consumer Fraud Act to cases such as this could be harmful to banks and brokerage houses, as the ramifications of applying the statute to such sales could be mind-boggling because of the treble damages and court costs provisions. You can read the full article online

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Thomas B. Lewis, Shareholder and Chair of Stark & Stark's Employment Litigation group, was quoted in the May 7, 2009 Dow Jones article, BROKER'S WORLD: Brokers Fight Bonus Repayment - And Lose. The article discusses the recent rise in companies enforcing the repayment of signing and retention bonuses. Mr. Lewis states that, "Enforcement proceedings...are becoming even more common as brokers move to different companies and cash-strapped brokerages try to grab whatever money they can."

You can read the full article online here. (PDF)

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Shareholders from Stark & Stark's Litigation group will hold a free seminar entitled Litigation Strategies For Business Wednesday June 24, 2009 at 9:00 AM in the firm's Lawrenceville office. Join Stark& Stark's Litigation attorneys as they assist you in developing a strategic plan that minimizes the impact commercial litigation has on your business. Stark & Stark's team of commercial litigators hold decades of experience prosecuting and defending complex claims of copyright and trademark infringement, breach of contract, fraud, theft of trade secrets, and unfair competition.

In the Litigation Strategies For Business Seminar you will learn how to develop a litigation strategy to be employed in any type of commercial lawsuit including:

• Assessing both the benefits and risks of litigation
• Pursuing insurance coverage
• Determining when and whether to seek a negotiated resolution to litigation
• Developing strategies for less expensive dispute resolution alternatives including mediation and arbitration
• Managing and planning the cost of litigation
• Taking necessary steps to protect your business' interests

The seminar is free, however, registration is required. Please contact Kelly at (609) 791-7030, or by email: Kelly@stark-stark.com to register.

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It is an eventuality that virtually all of us will face sometime during our lives, the loss of a loved one.  Whether this loved one is one of your parents, a sibling, a relative, or a friend, litigation may arise concerning the Probate of their Will in order to administer their Estate.  Estate litigation is often emotional, costly and is similar in the emotions it evokes to that of a divorce proceeding.  Often times, the Executor of the Estate may use the Estate’s assets to defend the Will.  On the other hand, a contestant of the Will must often pay their own counsel fees with only a possibility of being reimbursed by the Estate.  As such, a person challenging a Will should first evaluate the value of the Estate and their potential gain as compared to the expenses they may incur in seeking that relief .  In addition, a party should consider the emotional trauma which is very prevalent in Estate litigation.  An Executor of the Estate or beneficiary whose bequest is being challenged has no other alternative than to defend against the challenge being brought against their interest or a challenge against the Will itself. 
 

In the State of New Jersey, there are essentially two ways in which an individual may challenge a Will.  The first way is to allege that the decedent lacked the requisite capacity the date the Will was executed.  This is a fairly low standard to meet, as the decedent need only be aware that he/she possesses assets, and in addition, that he/she wishes to transfer these assets to certain other individuals.  In levying a challenge in this regard, the Court may review medical records and other information concerning the decedent’s physical and mental health in order to determine if this individual possessed the requisite mental capacity on the day the Will was executed.  The medical records are relevant as they may demonstrate physical or mental conditions which could suggest that the decedent may have lacked the capacity to execute a Will on the date the Will was executed.  This often involves the need for expert witnesses to review medical records, and thereafter, to render their opinion as to the capacity of the decedent on the date the Will was executed. 
 

The other way in which an individual may challenge a Will concerns an allegation of undue influence.  Simply put, undue influence means that the Will does not reflect the true intentions of the decedent, but instead, reflects the wishes of an individual who asserted their influence over the Testator, thereby rendering the Will inconsistent with the Testator’s true wishes.  In order to prove a claim of undue influence, the contestant must first establish that there existed a confidential relationship between the decedent and the party which is alleged to have unduly influenced the Testator.  A confidential relationship exists when the Testator and another individual shared a relationship where trust or confidence is naturally reposed by the decedent with this individual.  Another instance under which a confidential relationship arises is in an attorney/client relationship where there is a fiduciary relationship between the parties. 
 

Once the contestant of the Will has established the existence of  a confidential relationship, he/she must establish suspicious circumstances with regard to the creation and execution of the Will.  Once this has been achieved, the Court can shift the burden of proof upon the proponent of the Will to demonstrate the validity of this document. 
 

After a lawsuit has been commenced, the Court will often recommend that the parties consider mediation in an attempt to resolve the matter without the need for additional litigation.  Often, the parties are able to resolve the litigation through Mediation without the parties incurring additional expenses.  If a case cannot be resolved through mediation, the case will move forward through discovery, and thereafter, to Trial.  Once an Estate litigation matter is scheduled for Trial, the parties should be aware that the Trial will not be heard before a jury, but rather is decided by a Chancery Judge that hears probate matters.  Once the Judge renders his/her decision, either side may make an application for fees to the Estate. 
 

If the party prevails in contesting the Will, the Will could revert to a previous Will, if said document still exists, or the individual could be deemed as having died without a Will.  Thereafter, the Court may appoint an independent Executor if the named Executor is disqualified.  If the Will is not invalidated by the Court, then it will be probated in the manner which had been sought to be probated by the Executor originally.  Thereafter, the Estate litigation will conclude.

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Minority shareholders in closely held corporations often find themselves on the outside looking in when it comes to managing the daily affairs and making important corporate decisions regarding the corporation in which they have invested. The reason for this circumstance is that, generally, the majority shareholders of a closely held corporation constitute the management of the corporation and, therefore, maintain control. With this division of power, it is not uncommon for minority shareholders of a closely held business to feel as though decisions are being made which favor the majority over the minority and that as minority shareholders they are being “oppressed.” Allegations of oppression often arise when management’s decisions result in the majority shareholders being awarded excessive compensation; when management furnishes what are deemed by the minority to be inadequate dividends; when management is accused of misapplying corporate assets; when shareholders in closely held corporations consist of family members or friends and the personal relationships deteriorate; or when minority shareholders become dissatisfied with the management of the corporation.

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.

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Another form of minority oppression involves the majority shareholders awarding excessive compensation to themselves and/or members of their family.  This often occurs to the detriment to the minority shareholder and the corporation itself. Examples of excessive compensation have been found in the form of bonuses, salaries, pensions, profit sharing plans, and overly generous expense accounts and perks.
 

A minority shareholder who is the target of this commonly used squeeze-out technique may seek redress in the form of direct and derivative causes of action. An oppressed minority shareholder may assert a derivative claim on behalf of the injured corporation based upon the theory that the excessive compensation is a breach of fiduciary duty or constitutes corporate waste. Moreover, the oppressed minority shareholder may assert a direct claim under New Jersey’s minority oppression statute.
 

Of course, there are problems associated with proving that the majority has awarded themselves or others close to them excessive compensation. Because of the large number of objective factors involved in setting an employee’s compensation package, Courts have not set forth an exact formula or rules in determining what is and what is not excessive. In general, Courts have considered some of the following factors when arriving at the conclusion what is reasonable compensation:

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.

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The termination of a minority shareholder’s employment; the reduction of their salary; and/or the termination of their spouses’ and/or children’s employment frequently have devastating consequences. It is common that the terminated minority shareholder’s only source of income was the closely-held business in which they hold an ownership interest. Without their salary, the minority’s interest is, at least temporarily, worthless.

   
The majority’s decision to terminate their employment, or sharply cut the minority shareholder’s salary, frequently results in an immediate and significant economic crisis. It does not take much to imagine the financial strains associated with the loss of employment. Sometimes to make the squeeze-out more effective the majority shareholder may cancel the minority shareholder’s insurance policies and deprive them of the financial benefits of being an owner/employee of the closely held company. During the course of my representation of oppressed minority shareholders, I have seen majority shareholders try to take away the minority shareholder’s use of a company car and the suspension of their country club membership.

   
The termination of the minority shareholder’s employment is often coupled with the use of other squeeze-out techniques such as: withholding shareholder distribution; changing the company’s office’s locks; escorting the minority shareholder out of the building; making inappropriate comments to other employees, vendors, customers or clients about the minority shareholder or their termination; changing the computer’s passwords; denying access to the company’s books and other financial records; and sometimes threatening or engaging in physical violence.

   
Generally, the goal of the majority shareholder who terminates the employment of the minority (and/or their family members) is to acquire their interest at a below market price. Frequently, a terminated minority shareholder is pressed for money. Like most people, they still have the same financial obligations they had the day before their employment was terminated. Often, minority shareholders confronted with this dilemma will accept a below-market price for their interest in the company so that they can meet their current financial obligations.  That is unfortunate.

   
Fortunately, the law may provide redress for minority shareholders who find themselves in the afore-described situation. The oppressed minority shareholder may seek remedy in the Courts. Many times, New Jersey Courts will grant an injunction either reinstating the minority member’s employment, or ordering the majority to pay the minority shareholder as if they were still employed. Unlike regular “at will” employees who are severally limited as to the ways they can challenge an employer’s decision to terminate them; a terminated minority shareholder has the oppressed minority shareholder statute along with enhanced fiduciary duty claims within their arsenal. 
 

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Shareholders from Stark & Stark's Litigation group will hold a free seminar entitled Strategies For Commercial Litigation Wednesday March 25, 2009 at 9:00 AM in the firm's Lawrenceville office. The seminar will discuss how to develop a strategic plan for your business that minimizes the impact of commercial litigation. In this seminar you will learn from Stark & Stark’s experienced commercial litigators how you can prepare to defend claims by employees, customers and government entities.

Stark & Stark’s team of commercial litigators hold decades of experience prosecuting and defending complex claims of copyright and trademark infringement, breach of contract, fraud, theft of trade secrets, and unfair competition. In the Strategies For Commercial Litigation Seminar you will learn from experienced commercial litigators how to develop a litigation strategy that can be employed in any type of commercial lawsuit including:

• Assessing both the benefits and risks of litigation
• Pursuing insurance coverage
• Determining when and whether to seek a negotiated resolution to litigation
• Developing strategies for less expensive dispute resolution alternatives including mediation and arbitration
• Managing and planning for the cost of litigation
• Taking necessary steps to protect your business’ litigation interests

The seminar is free, however, registration is required. Please contact Kelly at (609) 791-7030, or by email: Kelly@stark-stark.com to register.

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Thomas B. Lewis, Chair of Stark & Stark's Employment group, was quoted in the March 5, 2009 LancasterOnline.com article Brokers battle over client info. Mr. Lewis comments on the pair of Lancaster brokerage firms alleging that two former Smith Barney employees, William Meyer and Marcy LePrell, took confidential customer information with them when they joined Janney Montgomery Scott on Feb. 18, 2009.

You can read the full article online here.

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The majority’s decision to withhold the distribution of dividends is simply to apply and exhort great financial pressure on the minority. The majority’s use of this simple squeeze-out technique is often used to try and buy the minority’s interest in the corporation for a below-market price. It is most effective and potentially devastating in cases where the minority is highly dependent upon receiving their income from dividends. During the course of my representation of oppressed minority shareholders, I have seen majority shareholders attempt to withhold distributions to: a widower of a former employee; a handicapped person who can no longer work; and an employee who recently lost his job.


The oppressor often couples the withholding of dividends with other squeeze-out techniques. Often, the key to the success of the use of the withholding of distributions squeeze-out technique is tied to the financial wherewithal of the minority to live without the income stream.  If the minority does not need the distributions then the failure to pay dividends is probably going to be less effective. That is why I often see the dividend squeeze-out technique to be coupled with the termination of the minority’s employment or a major reduction of the minority’s salary.


Sadly, majority shareholders will often fabricate legitimate reasons why dividends are not being distributed. Examples of excuses often used are: the recession; the loss of a client or customer; and the need for the corporation to upgrade its equipment. It becomes the burden of the minority shareholder or their attorney to prove that the stated reason is not the real reason for the decision to withhold the distribution.  That is because Courts recognize that there are many plausible reasons why funds available for distribution as dividends should be retained by the corporation.  A minority shareholder challenging the majority’s failure to issue dividends often encounters many legal and factual obstacles in obtaining relief from a Court of law.


One obstacle is the Court’s adherence to the “business judgment rule.”  It embodies a broad judicial deference to the corporation’s board of directors. The Court’s deference to the “business judgment rule” is less of a concern when it considers the actions of a board in the case of a closely held company.  That is because in the case of a close corporation the decisions often made by the board directly affect their own interests. In other words, Courts are less inclined to strictly adhere to the “business judgment rule” where the voting shareholder has a conflict of interest.   


Another possible legal obstacle a minority shareholder confronts when seeking to challenge the decision of the majority is the principle of majority control or governance of the corporation.  Fortunately, New Jersey’s minority oppression statute does provide an exception to the general rule if the oppressed minority shareholder can demonstrate that the majority’s decision frustrates their reasonable expectations as a shareholder. Brenner v. Berkowitz, 134 N.J. 488, 506 (1993). Hence, if the minority can show that the pro-offered reason to withhold distributions is false or overstated they may seek redress.


Courts have examined a number of factors when considering whether or not the decision to withhold dividends is justified or oppressive. First and foremost, the Court will consider the corporation’s present and prospective financial needs. In doing so, Courts will often study the testimony of experts who provide it with testimony related to the amount of surplus cash the corporation is holding; the amount of retained working capital in previous years; the company’s business prospects; the need (if any) for expansion and the cost of any proposed expansion; along with the corporation’s liabilities. Courts will also consider whether or not other possible squeeze-out techniques are being employed by the majority. The Court is far more inclined to find the failure to pay dividends is oppressive if other factors are present. 


A Court who finds that the decision to withhold distributions was “oppressive” can employ a number of legal and equitable remedies. They include, but are not limited to: forcing the majority shareholder to pay the distributions which should have been made; ordering that the majority purchase the minority’s shares for “fair value”; and/or awarding reasonable counsel fees and costs the minority spend in cases where the majority has acted in bad faith.
 

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