Contingency Fee and Other Alternative Fee Arrangements

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Often oppressed minority shareholders cannot afford the cost to retain an attorney to stand up to the oppressor. The majority shareholder will use the company’s financial resources to pay their attorney while the oppressed minority shareholder will be forced to cover their attorney fees personally. Although, Courts have discretion to award counsel fees, rarely do they award them to the oppressed. 

Oppressed minority shareholder should not hesitate to ask prospective attorneys about handling their case on a contingent fee basis. Often, I agree to handle minority oppression claims with a contingency fee arrangement. Before doing so, I discuss the pros and cons of a contingency fee versus an hourly fee. Factors that should be considered are: the value of the client’s shares; whether or not the majority will litigate for a prolonged period of time; and the ability to pay legal bills during the course of the litigation. If you are an oppressed minority shareholder, you should discuss alternative fee structures such as contingency fee arrangements with your prospective attorney. I am always happy to discuss and consider a contingency. Perhaps, a contingency fee structure will give you give you the ability to stand up to the oppressor.

Additional Causes of Action to Be Considered In Divesture Litigation

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In addition to oppression claims, the following causes of action may be applicable and therefore should be included in the complaint or asserted against the Plaintiff when filing counterclaims:

  1. Breach of fiduciary duty
  2. Restrictive Covenant claims
  3. Computer Fraud and Abuse Act claims.  See, 18 U.S.C §1030(a)(4); N.J.S.A. 2A:38A
  4. Usurping corporate opportunities
  5. Unfair competition
  6. Tortuous interference with contract
  7. Breach of Contract Claims
  8. Trade Secret Claims
  9. Employment Discrimination
  10. Commercial Disparagement
  11. Civil Conspiracy
  12. Conversion
  13. Fraud 

Additional Causes of Action in Oppression Litigation - Corporate Opportunity Doctrine

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Often, business break-up or oppression litigation will include allegations that one side or the other breached fiduciary duties. Courts have consistently recognized shareholders who owe certain fiduciary duties to the other shareholders and corporate entity.  See, Orchard v. Covelli, 590 F.Supp. 1548, 1556 (W.D. Pa. 1984) (citing various Delaware cases).   The corporate opportunity doctrine prohibits directors, officers and employees from personally taking advantage of business opportunities that fall within the company’s business activities.  For example, if a shareholder of a law firm that handles personal injury cases is approached by  potential personal injury client, that shareholder must bring the case to her law firm. If she were to handle the case “on the side,” without the knowledge or consent of the other shareholders and corporation, she breached fiduciary duties  because officers, directors and employees are prohibited from competing with the corporation.   See, Levy  & Surrick v. Surrick, 362 Pa. Super. 510, 524 A.2d 993, 995 (1987).

Professionals to Consult when Involved in a Business Breakup Case

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The breakup of a corporation, limited liability company or partnership is an extremely complicated and stressful process.  Whether you are the minority asserting that the majority is acting fraudulently, illegally or oppressively towards you or the majority denying the same, you will need professionals to guide you through the process.  One of the first people you will probably think of retaining is an attorney who can guide you through the legal process.  Obviously, you want to retain an attorney who is experienced, knowledgeable, responsible, competent, diligent, and responsive to your needs.   In addition, to an attorney, I strongly encourage you to consider the following professionals to help guide you through the process: 

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How New York Determines Whether or Not a Minority Shareholder Has Been Oppressed

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New York applies the “reasonable expectations of the shareholder” test when determining whether or not a minority shareholder has been oppressed.    In the Matter of the Judicial Dissolution of Kemp & Beatley, Inc., 473 N.E. 2d 1173 (1973), involved a minority shareholder’s petition in which he sought to dissolve a New York corporation based upon alleged oppressive conduct in violation of New York’s involuntary dissolution statute (Business Corporation Law, Section 1104-a).   New York law permits the dissolution of a corporation if the controlling shareholder acts fraudulently, illegally, or oppressively towards the complaining shareholders.   The New York Court of Appeals citing legal and scholarly articles developed and adopted the reasonable expectations of the shareholder test. In doing so, the New York Court stated that “oppressive actions refer to conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise.”  

Reasonable Expectations of the Shareholder

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 Although, there are two lines of Pennsylvania cases which define shareholder oppression differently, it appears that the majority view is that Pennsylvania, like New Jersey and New York applies the “reasonable expectations” of the shareholder test.  Del Borrello v. Del Borrello, 62 Pa. D. & C 417, 424-426 (2001).   Nevertheless, at least one court has looked outside the case law on shareholder oppression and relied on a non-legal definition to define “oppression” as “unjust or cruel exercise of authority or power.”  See, Leech v. Leech, 762 A.2d 718 (2000) (quoting, Meriam Webster’s Collegiate Dictionary (10th ed. 1996)).  

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Recent Minority Oppression Case Awards Counsel Fees to Plaintiff

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On June 14, 2013, the New Jersey Appellate Division released a decision in a minority oppression case.  In Kaible v. Gropack, A-5666-1T3, the Appellate Division affirmed a trial court’s finding that the Plaintiff was the victim of oppression. Moreover, the Kaible Court affirmed the trial court’s decision to award counsel fees to the Plaintiff. 

Plaintiff Kaible was a one-third shareholder of a closely held New Jersey corporation.  Mr. Kaible was able to successfully present evidence that he was the victim of minority oppression.    Kaible was able to demonstrate that the majority oppressed him by: (1) denying him access to the company’s books and records; (2) forcing him out of the company; (3) excluding him from participating any management or decision making; (4) requiring him to assume a different position within the company at the majority’s command; (5) not permitting him to rendered services as an officer of the company; (6) terminating his employment; and (7) refusing to tender his last pay check.

Finally, the trial court awarded counsel fees pursuant to N.J.S.A. 14A:7-(8)(d).   In doing so, the Appellate Division held that the “trial judge is ‘not required to find that defendants acted in bad faith in order to award plaintiff counsel fees pursuant to’ subsection (8)(d), but rather, ‘that the judge find that shareholder oppression took place.’”     

What is Corporate Deadlock?

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The New Jersey Business Corporations Act and current New Jersey Limited Liability Company Act have slight differences in the way they define and address “corporate deadlock.”   

The New Jersey Business Corporations Act contains two “deadlock” provisions.  N.J.S.A. 14A:12-7.   Subjection (1)(a) provides that the court may take remedial action upon proof that: “the shareholders of the corporation are so divided in voting power that, for a period which includes the time when the two consecutive annual meetings were or should have been held, they failed to elect successors to directors whose terms have or would have expired upon the election and qualification of their successors.”  N.J.S.A. 14A:12-7(1)(a).  Thus, deadlock may be shown if the members fail to elect the requisite number of directors per the bylaws for two consecutive annual meetings.
The second statutory deadlock provision in the New Jersey Business Corporations Act is more general.  It states that a Court may order appropriate relief if a corporation’s directors “are unable to effect action on one or more substantial matters respecting the management of the corporation’s affairs.”  N.J.S.A. 14A:12-7(1)(b).  That section applies when the corporation is unable to act because the directors cannot agree.    An example of deadlock would be if the two directors could not agree on whether or not the corporation should borrow money when the corporation was unable to meet its obligations.   
Once “deadlock” is established in the case of a corporation, the Judge is free to utilize various statutory and equitable remedies at their disposal.  For example, the Judge could appoint a provisional director or receiver to run the affairs of the corporation.  They could also order one side to buy the other out, dissolve the company or split the assets of the company.   The use of provisional directors and receivers is often an effective tool within the Court’s arsenal to insure that deadlock does not paralyze or destroy the corporation during the pendency of the litigation.  
The term, “deadlock” is not used in the current New Jersey Limited Liability Act.  Rather, the concept of “deadlock” is sort of addressed in N.J.S.A. 42:2B-49 (“Dissolution by Decree”).  That  section of the current version of the New Jersey Limited Liability Company Act allows a member or manager to seek dissolution of the LLC “whenever it is not reasonably practicable to carry on the business in conformity of the operating agreement.”  Moreover, the current version of the LLC Act does not explicitly permit the Court to appoint a receiver or provisional director to run the company when deadlock is present.  Notwithstanding the same, the New Jersey Supreme Court in Brenner v. Berkowitz found that the Chancery Courts are a court of equity and the Judge’s are not limited to the enumerated statutory remedies.  Hence, a Chancery Judge may through the use of their inherent equitable powers appoint a receiver or provisional director to run the LLC if they find that equity necessitates the same. 
Recently, I’ve written a lot about the New Jersey Revised Limited Liability Company Act.  That act which will go into partial effect on March 18, 2013 and  full effect on March 1, 2014, recognizes the minority oppression cause of action and for the first time statutorily allows the Chancery Court to appoint a provisional director or receiver to be appointed when the Court determines that it is warranted.  Although, Chancery Court’s always had these powers within their equitable powers, some Chancery Judges were more reluctant to be proactive and go outside the statutes to formulate a remedy.  The New Jersey Revised Limited Liability Company Act will give members and their counsel greater ability to convince Judges who may have been hesitant to go outside the statute when formulating a remedy.  That is, because for the first time these remedies are codified.
Scott Unger is a Shareholder in Stark & Stark's Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation.  For questions, or additional information, please contact Mr. Unger.


Oppression is Found

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The Minority Oppression statute sets forth four remedies which a Court “may” order to remedy oppressive conduct.   The Minority Oppression Statute provides that a Court may appoint a custodian, appoint a provisional director, order the sale of the corporation’s stock (per the statute) or enter a judgment dissolving the corporation.  Id. The Statutory power of a Court to Order a stock sale is described in further detail in N.J.S.A. 14A:12-7(8).  On its face, it appears that N.J.S.A. 14A:12-7(8) does not authorize a mandatory purchase by someone otherwise unwilling to buy the stock.   Nevertheless, a Court may use it’s equitable powers to Order that shareholder to buy another shareholder’s stock if oppression is found.  Bonavita v. Corbo, 300 N.J. Super. 179, 197-198 (Ch. Div. 1996).   That is because in Brenner v. Berkowitz, 139 N.J. 488, 512-514 (1993), the New Jersey Supreme Court held that when a statutory violation such as oppression occurs, Courts retain their equitable discretion to fashion remedies.  Hence, if a Court finds that the majority oppressed the minority it could order the majority to purchase the minority shares for “fair value,” even if the majority does not want to buy that interest. 

Scott Unger is a Shareholder in Stark & Stark's Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.

Shareholder Agreements Can Protect Shareholder Interests and the Success of Closely Held Corporations

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A Shareholder Agreement, sometimes referred to as a Buy-Sell Agreement, can be a helpful tool in the structuring and governance of a closely held corporation.  Unlike publicly traded and large corporations, closely held corporations have only a few shareholders, which in some cases are friends or members of the same family.  Although in an ideal world shareholders of a closely held business get along, especially when friends and family, it is important for the Shareholders to execute a Shareholder Agreement.  The Shareholder Agreement can protect the individual interests of the shareholders, which may not always be aligned, and prevent an unnecessary dissolution of the Corporation over a shareholder dispute.

A Shareholder Agreement typically provides for, among other things, restrictions on the transfer of stock in the corporation.  This is especially important in a closely-held business because the owners of the business want to make sure that any new owner buying into the business is approved by the existing owners.  The Shareholder Agreement can also provide for a right of first refusal, which will give the existing owners the option to purchase an owner’s stock in the event of a sale.  In addition, if the corporation becomes marketable to another entity or person, but the purchaser wants all or none of the stock of the corporation, what is known as a “drag-along” provision will require minority owners to sell their stock along with the majority owners.  Similarly, a “tag-along” provision will protect the minority owners from the sale of the majority of the stock, requiring the minority stock to be sold along with the majority as a package.  

In addition to restricting transfers of stock, the Shareholder Agreement can provide for certain shareholders to be designated as directors to manage the corporation and methods for resolution of shareholder disputes, such as arbitration or buyout provisions.  Without these provisions, a dispute between the owners of the corporation could require expensive litigation and even result in the dissolution of the corporation. 

Perhaps most importantly, the Shareholder Agreement can implement non-competition, non-solicitation and confidentiality provisions to prevent a disloyal owner from competing with the corporation, pilfering intellectual property and poaching customers, employees or suppliers.  These provisions, when carefully drafted, can protect the profitability of the corporation, even after the disloyal shareholder sells his interests in the corporation.

The above provisions are just a few examples of the issues that can be addressed in a Shareholder Agreement.  It is important for all closely-held corporations to have a Shareholder Agreement drafted to address the particular needs of the shareholders and the corporation. If your corporation needs a Shareholder Agreement, speak with an attorney to discuss drafting a Shareholder Agreement that can protect not only the interests of the shareholders, but also the future success of the corporation. 

Dolores Kelley is a Member of Stark & Stark's Business & Corporate Group in the firm's Lawrenceville, New Jersey Office. For questions, or additional information, please contact Ms. Kelley.

Older Entries

March 26, 2013 — Courts May Use Equitable Powers to Order A Mandatory Purchase of Stock if Oppression is Found

March 20, 2013 — The New Jersey Revised Uniform Limited Liability Company Act Provides for Remedies to Redress Oppression

March 15, 2013 — The "Purpose" for Forming LLCs was Expanded by New Jersey's Revised Uniform Limited Liability Company Act

March 13, 2013 — The Revised Uniform Limited Liability Company Act Changes the Duration of the Company

March 7, 2013 — The New Jersey Revised Uniform Limited Liabilty Company Act Broadly Defines the term "Operating Agreement"

March 5, 2013 — The New Jersey Revised Uniform Limited Liability Act Codifies the Covenant of "Good Faith and Fair Dealing"

February 28, 2013 — New Jersey Revised Uniform Limited Liability Company Act Now Provides the Remedies and Protections Afforded Oppressed Minority Shareholders

February 26, 2013 — New Jersey Revised Uniform Limited Liabilty Act Addresses Manifestly Unreasonable Operating Agreements

February 25, 2013 — New Jersey Revised Uniform Limited Liability Company Act is Almost Upon Us

February 22, 2013 — Mark Your Calendars: The New Jersey Revised Uniform Limited Liability Company Act is About to Go Into Effect

January 15, 2013 — New Jersey Courts Focus on the Respective Shareholders' Power or Lack Thereof, When Determining Who an Oppressed Minority Shareholder Is

September 27, 2012 — Modernizing the New Jersey Limited Liability Company Act

August 22, 2012 — Minority Oppression: New Jersey Supreme Court Affirms Chancery Court's Order Allowing the Minority Shareholder to buy-out the Majority Shareholder's interests

August 17, 2012 — 50% Shareholder Can Assert Claims of Oppression and Breach of Fiduciary Duty Against Another 50% Shareholder

August 13, 2012 — Pre-Derivative Suit Demand Letter Is Not Required In Pennsylvania When Corporation In Question Is Closely Held

August 10, 2012 — Pennsylvanian Courts Are Permitted to Provide Equitable Relief to Oppressed Shareholders

August 9, 2012 — Stark & Stark Shareholder Discusses The Minority Oppression Statute

August 6, 2012 — Internal Affairs Doctrine of Corporation Not Applied in Another New Jersey Minority Oppression Case

August 3, 2012 — Court gives guidance on valuing a start-up company under minority oppression statute

July 30, 2012 — Termination of Shareholder's employment May Trigger Protections Under New Jersey's Minority Oppression Statute

July 26, 2012 — New Jersey Chancery Court Applies Corporation Case Law to the Break-up of Limited Liability Companies

July 23, 2012 — New Jersey Legislature is Debating the Enactment of a Bill Which, if Enacted Would Change the Current Law Governing Derivative Proceedings and Shareholder Class Actions

July 20, 2012 — Party Claiming That They Are an Oppressed Minority Shareholder Must Demonstrate A Nexus Between the Misconduct And The Shareholder or Their Interest in The Corporation

July 16, 2012 — Pennsylvania Courts May Appoint A Corporate Custodian When Oppression Shown

July 12, 2012 — Other Jurisdictions Are Not As Generous As New Jersey When Determining the Existence of Shareholder Oppression

July 9, 2012 — Pennsylvania Recognizes the Minority Oppression Claim

July 5, 2012 — A Court May Appoint A Receiver In A Minority Oppression Case

July 2, 2012 — NJ Minority Oppression Litigation May be Filed in the Chancery Division

June 25, 2012 — Minority Oppression Statute Only Applies to Closely Held Corporations

June 18, 2012 — New Jersey Does Not Always Require Pre-Suit Demand On Board of Directors Before Filing Derivative or Minority Oppression Claims

June 11, 2012 — Sometimes Shareholders Assert Derivative Claims In Conjunction with or Alternatively to Minority Oppression Claims

May 15, 2012 — New York Minority Oppression: Buyout the preferable remedy

May 8, 2012 — New York Minority Oppression: Reasonable Expectations of the Shareholder Test.

May 1, 2012 — The Interplay of Experts and Attorneys Is Important in Minority Oppression Litigation

April 24, 2012 — New York Law Protects Minority Shareholders From Oppression

April 17, 2012 — Selecting a Qualified Business Valuation Expert For A Minority Oppression Case

March 26, 2012 — Valuation Technique Used In Minority Oppression Litigation: Capitalization of Income.

March 6, 2012 — Methods Used By Experts in Determining "Fair Value" in Minority Oppression Litigation

February 21, 2012 — The Termination of a Shareholder/Employee Without Cause Could Constitute Minority Oppression

February 7, 2012 — The Applicability of Minority Oppression Claims to Limited Liability Companies

November 14, 2011 — Oppressed Shareholders May Find Redress in Statutes, Common Law and Equity

October 19, 2011 — Selecting an Attorney for Your Minority Oppression Case

October 17, 2011 — Minority Oppression In New Jersey May Be Found Where The Court Finds That the Majority Abused Their Authority or Acted Unfairly

October 10, 2011 — The Majority's Conduct Need Not Be Fraudulent, Illegal or Wrongful to Constitute Minority Oppression Under New Jersey Law

October 3, 2011 — Courts Have the Power to Order A Buy-out When Minority Oppression Is Found

September 6, 2011 — Minority Opression: Splitting Off the Profitable Parts of a Business and Transferring Them to an Entity Controlled by the Majority

August 23, 2011 — Self-Dealing Violating Shareholders Agreement

July 18, 2011 — New Jersey Case Law's Modernization Of The Internal Affairs Doctrine Protects Oppressed Minority Shareholders

July 7, 2011 — Minority Oppression - Appointment of A Custodial Receiver

May 25, 2011 — Conflicting Loyalties: When corporate counsel should not represent a shareholder

April 19, 2011 — Inspection Rights Under New Jersey Corporate Law.

February 24, 2011 — Minority Oppression: Transfer or Sale of Corporate Assets

February 1, 2011 — Amendments to Certificate Of Incorporation May Constitute Minority Oppression

December 22, 2010 — Minority Oppression: Course of Dealing to Establish the Reasonable Expectations of the Shareholders

December 15, 2010 — Minority Oppression: The Business Judgment Rule May Not Shield The Oppressor

December 6, 2010 — Minority Oppression: Shareholders' Agreement Do Not Govern If Minority Oppression

November 22, 2010 — Shareholder Oppression: Mergers As Oppression

November 12, 2010 — Minority Oppression: Dilution of the minority shareholder's interest.

October 25, 2010 — Minority Oppression: Stealing

October 18, 2010 — Minority Oppression: Conflicts of Interest

September 21, 2010 — When Disputes Go From Dinner Table to the Conference Room

August 31, 2010 — Stark & Stark Shareholder Obtains $3,000,000 Settlement in Shareholder Oppression Case

June 29, 2010 — Closely Held Business - Loans to Directors, Officers or Employees

June 15, 2010 — Minority Oppression: Conflicts of Interest - Taking Advantage of a Business Opportunity

June 2, 2010 — Bad Contracts Between Shareholders - Unfavorable Loans and Lease Agreements

July 21, 2009 — Squeeze-Out Technique: Withholding Information

March 27, 2009 — Squeeze-Out Technique: Excessive Compensation

March 20, 2009 — Squeeze-Out Technique: Termination of the Minority Shareholder's Employment

March 6, 2009 — Squeeze-Out Technique: Withholding Distributions

February 27, 2009 — A Panoramic Discussion of the Squeeze-Out Techniques Often Used By Majority Shareholders

February 2, 2009 — Squeezed Out By Your Business Partner?

March 25, 2008 — Minority Oppression in Relation to "Fair Value" of Stock

August 28, 2007 — A Nutshell on Marketability & Minority Discounts in New Jersey

May 18, 2007 — New Jersey Legal Update - Podcast # 66

February 23, 2007 — New Jersey Legal Update - Podcast # 60

July 10, 2006 — Valuation in Minority Oppression Litigation

December 16, 2005 — New Jersey Legal Update - Podcast # 19