The Appellate Division found that Delaware law should govern the dispute because unlike the decisions which were the subject of my previous blog posts there were no substantial relationships to New Jersey. Moreover, there was no fundamental policy which required the application of New Jersey law. In other words, unlike Krzastek v. Global Resource Industrial and Power, Inc., No. A-1815-06T2 (App. Div. Sept. 11, 2008) and Conway v. DialAmerica Marketing, Inc., BER-C-116-08 (Super. Ct. Sept. 30, 2008), Nightingale & Associates, LLC did not maintain full time offices in New Jersey. Moreover, Nightingale & Associates, LLC did not employ many New Jersey residents.
 

Finally, only one owner of Nightingale & Associates, LLC had ties to New Jersey (although, he moved to Indiana prior to the commencement of his litigation). In addition, the entities in the Krzastek and Conway cases were corporations. The entity in the Hopkins case was a limited liability company where the parties entered into an operating agreement and agreed that Delaware law should apply. Those reasons led to the use of Delaware law in the Hopkins case.
 

Application of the Minority Oppression Statute to an LLC
In an article I published in the New Jersey Law Journal, I asserted that the minority oppression statute may not apply to limited liability companies. In that article, I asserted that the minority oppression statute should protect minority members of a Limited Liability Company. I asserted that the New Jersey Legislature should modify the statute to afford the same protections offered to minority members of a Limited Liability Company. The Appellate Division in Hopkins reaffirmed that the New Jersey minority oppression statute does not apply to limited liability companies. See also, Denike v. Cupo, 394 N.J. Super. 357, 378 (App. Div. 2007), rev’d on other grounds, 196 N.J. Super. 502 (2008).  Until the New Jersey Legislature amends the statute to afford minority members the same protections offered to shareholders in a corporation, I strongly encourage minority members to insist that the operating agreement afford them the protections found in N.J.S.A. 14A:12-7(c).

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.

The common law also offers minority shareholders protections from oppression. An oppressed minority shareholder could assert a breach of fiduciary duty claim, if the majority puts their interests over the interests of the company or the minority shareholder. A claim based upon common law fraud may be used in certain circumstances where the majority knowingly (with scienter) makes false or misleading statements which are detrimentally relied upon by the minority shareholder. Sometimes, a minority shareholder may successfully assert breach of contract claims against the majority.  If the majority is stealing corporate assets the minority may successfully assert conversion or misappropriation of company asset claims. 

Finally, courts possess equitable powers.  Courts may use their inherit equitable powers to remedy oppressive situations. For example, in one of my recent cases, the Judge appointed a provisional director to serve as a tie-breaker when two fifty-percent (50%) shareholders could not reach agreement. Moreover, Courts may enter a Temporary Restraining Order enjoining a party from engaging in behavior it deems to be detrimental to the corporation, a shareholder, or both. 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

Sometimes prospective clients describe a situation they believe is not actionable when, in fact it is a form of oppression. Oppression is not always self-evident. Other times, prospective clients will describe situations they believe constitutes oppression when those facts, even if true do not create a cause of action for minority oppression.

I hope my previous blog posts help you identify what may and may not constitute minority oppression. And if you believe you are a victim of minority oppression, please contact me to set up a meeting here in my firm's Lawrenceville, New Jersey office to discuss your matter in more detail.

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

In evaluating the majority’s conduct, particularly in close corporations of less than 25 individuals, courts must determine whether the majority has acted fraudulently or illegally, mismanaged the corporation, or abused their authority as officers or directors, or have acted oppressively or unfairly toward a minority shareholder as provided under N.J.S.A. 14A:12-7(1)(c). Oppressive conduct has been defined as including that which frustrates a minority shareholder’s reasonable expectations. Brenner, 134 N.J. at 506 (citing 2 O’Neal’s Close Corporations § 9.29 at 132 (Callaghan & Co., 3rd ed.1988)).

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

Upon motion of the corporation or any shareholder who is a party to the proceeding, the court may order the sale of all shares of the corporation's stock held by any other shareholder who is a party to the proceeding to either the corporation or the moving shareholder or shareholders, whichever is specified in the motion, if the court determines in its discretion that such an order would be fair and equitable to all parties under all of the circumstances of the case. 

N.J.S.A. 14A:12-7(8). Pursuant to N.J.S.A. 14A:12-7(1)(c), N.J.S.A. 14A:12-7(8), along with the Court’s common law powers a buy-out of the minority’s stock for “fair value” may be Ordered.

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

An example of this oppressive technique is a corporation who has many divisions: sales, manufacturing and design. The sales and manufacturing divisions are profitable. The design portion of the company is not. The majority shareholder votes to have the sales and manufacturing divisions of the company transferred or sold for an inequitable price to another corporation owed solely by them (not the minority).

Fortunately, the minority shareholder may have recourse to prevent or stop this form of oppression.

First, if the transferring corporation did not receive anything for the division or assets which were transferred, it may be successfully argued that the transfer may be set aside for lack of consideration. Moreover, the transfer could be set aside because the majority shareholder engaged in "self-dealing." Again, as discussed in previous blog posts, the majority shareholder owes both the minority shareholder and the corporate enterprise itself certain fiduciary duties. By engaging in this form of oppression, a compelling argument may be made that the transfer of a profitable division to another entity controlled or owed by the majority (and not the minority) constitutes a breach of fiduciary duty. Finally, as discussed in previous blog posts, New Jersey law provides that it is unlawful, actionable minority oppression to interfere with the "reasonable expectations of the shareholders."

By engaging in the above-described activities, the minority's distributions may be reduced. Moreover, the corporation may be less profitable. A successful argument may be made that the transfer or a profitable division to another entity owed or controlled by the majority only interferes with the reasonable expectations of the shareholders." Hence, it is probably actionable under New Jersey's minority oppression statute. 

If you believe you are an oppressed minority shareholder and would like to discuss your situation in more detail, please contact me in my Lawrenceville, New Jersey office.

Arguably, in New Jersey, all the minority may have to show is that the corporate assets were sold to another entity controlled or owed by the majority. Even if the company receives a fair price for the business and assets, if the minority shareholder does not receive stock in the going concern (and had a reasonable expectation of future profits or employment) then they may be deprived the prospect of future earnings. The test in New Jersey is whether or not the minority shareholders "reasonable expectations" have been interfered with by the actions or in-actions of the majority. 

In states which require an inquiry into whether or not the purchase price was reasonable, Courts will subject that sale to "close" or "rigorous" scrutiny. In most states, whenever a corporation enters into a transaction with one of it's officers or directors or with a controlling shareholder, the insider has the burden of showing that the transaction between the corporation and one of its officers, directors or controlling shareholder is an arms length transaction. If it is found not to be, the Court may set aside that transaction. 

On the other hand, if the sale was made to outsiders as opposed to corporate officers, directors or to the majority shareholders (or those related to them), Courts are reluctant to reluctant to set aside the sale. That is because Court's adhere to the "business judgment rule" which provides that Judges should not substitute their judgment for the parties concerning matters of business judgment. 

If you believe you are a victim of self-dealing which violates your shareholder agreement, feel free to contact me in my Lawrenceville, New Jersey office. 

Just because the Court may appoint a custodial receiver does not mean it will or should exercise that equitable power. Generally, a Court will appoint a custodial receiver when it views their appointment as necessary to maintain the “status quo” during the pendency of the litigation. Kassover v. Kassover, 312 N.J. Super. 96, 100 (App. Div. 1998). Typically, a receiver may be appointed if the corporation is insolvent; there is deadlock amongst the shareholders; or the Court believes that a party running the day to day affairs of the company engaged in gross or fraudulent mismanagement of its corporate affairs. Ravin, Sarasohn, Cook, Baumgarten, Fish and Rosen, P.C., 365 N.J. Super. 241, 249 (App. Div. 2003). 

When considering whether or not to appoint a custodial receiver, the Court will determine: (1) whether or not the corporation itself or any owner would suffer irreparable harm if the Court does not make the appointment; (2) the likelihood that the party seeking the appointment will ultimately be successful at the conclusion of the case based upon the disputed facts known at the time; (3) whether or not the possible good associated with the appointment is outweighed by the problems to the corporation itself or the non-moving party in making the appointment; and (4) the effects on third-parties (i.e. the public, customers, vendors, employees, etc.) in appointing or not appointing a custodial receiver.

Shareholders in a closely held New Jersey corporation are generally permitted to inspect the books and records of the corporation. Upon the written request of any shareholder, the corporation is required to mail to the requesting shareholder its balance sheet at the end of the preceding fiscal year along with its profit and loss and surplus statement for such fiscal year. N.J.S.A. 14A:5-28(2).  Additional documentation may be requested provided the requesting shareholder has a “proper purpose” in examining the same. N.J.S.A. 14A:5-28(4) gives the Court great discretion in prescribing limitations or conditions relating to the inspection of additional corporate records.

Members in a New Jersey Limited Liability Company (“LLC”) are also afforded the right, subject to reasonable standards as may be set forth in an operating agreement or established by the manager to obtain from the LLC from time to time to receive or review:

1. information regarding the status and financial condition of the LLC;
2. the LLC’s state, federal and local income tax returns;
3. a list of the name and last known addresses of each member;
4. a copy of the governing operating agreement (along with any amendments); and
5. information regarding the amount of cash and a description and statement of the agreed to value of any other property or services contributed by each member and what each member promised to contribute in the future. N.J.S.A. 42:2B-25(a)(1)-(5). 

The treatment of said transfers under the New Jersey Business Corporations Act depends on whether or not they are made in the “regular course of business.”  For example, if the sale or transfer is made in the regular course of the corporation’s business then “no approval of the shareholders is required.”  N.J.S.A. 14A:10-10. If, on the other hand, the transfer of corporate property is not in the usual and regular course of the corporation’s business then shareholder approval with specific notice requirements are required.  N.J.S.A. 14A:10-11.
 

The problem for minority shareholders lies in the vagueness of the distinction between transactions which are and are not within the ordinary course of the corporation’s business. Typically, the majority will assert that the proposed sale of assets is within the usual and regular course of its business.  The minority will assert it is not.
 

The seminal case in New Jersey interpreting this important distinction is Good v. Lackawanna Leather Co., 96 N.J. Super. 439 (Ch. Div. 1967). In Good, the Court considered whether or not the sale of almost all of the company’s assets without shareholder approval violated the statute. The Good Court held the “test to be applied is not the amount or value of the assets disposed of, but rather the nature of the transaction, i.e., is the sale in furtherance of the express objects of the corporation's existence.”  Id.  Obviously, the Court’s answer to that inquiry will depend on the specific facts of relating to the transfer of the corporation’s assets.

• “exchange, classify, reclassify or cancel all or any party of its shares, whether issued or unissued,” N.J.S.A. 14A:9-1(f)
• “create new classes or series of shares having the rights and preferences superior or inferior to, or equal with, the shares of any class or series then authorized, whether issued or unissued”; N.J.S.A. 14A:9-1(j);
• “cancel or otherwise affect the right of the holders of any shares of any class or series to receive dividends which have accrued but have not been declared”; N.J.S.A. 14A:9-1(k); or
• “limit, deny or grant to shareholders of any class the preemptive right to acquire additional or treasury shares of the corporation whether then or thereafter authorized.”  N.J.S.A. 14A:9-1(p).    

Amendments to the Certificate of Incorporation may result in major negative changes to the way the corporation is governed. For example, the majority may seek an amendment which eliminates minority shareholders by making their stock redeemable and then seeking to redeem it.
   

Thankfully for minority shareholders, the New Jersey Business Corporation Act on its face offers some protections.  It requires that any amendment to the Certificate of Incorporation must be approved by the class of shareholders who will be affected by the change sought. N.J.S.A. 14A:9-2; N.J.S.A. 14A:9-3.  Notwithstanding the same, a minority shareholder could still be negatively  affected by an amendment to the Certificate of Incorporation if the majority controls a large enough percentage of the class.
 

Courts will sometimes block an amendment to the Certificate of Incorporation if they find that the amendment is unfair or is being used as a tool to act oppressively or illegally towards a minority shareholder. For example, in Whetsone v. Hossfeld Mfg. Co., 457 N.E.2d 380 (Minn. 1990), the Minnesota Supreme Court held that the majority shareholders vote to amend the Certificate of Incorporation whereby eliminating the minority’s veto rights allowed the minority to be brought out for “fair value.”

1. what are the reasonable expectations as a shareholder?
2. what is the basis of those expectations; and
3. how were those expectations breached?

One thing I focus on when considering those three important questions is the course of dealing between the shareholders. The course of dealing can be extremely important in establishing the shareholder’s reasonable expectations. For example, in one of my minority oppression cases, my client received company financial records for more than ten years.  After that ten plus year period, the majority unilaterally decided to prevent the minority shareholder from reviewing the closely held company’s books and records. The course of allowing my client to review the books and records for the ten plus year period could be used to establish that my client had the reasonable expectation to receive and review the company’s books and records. 

It is well settled in New Jersey that the formula or methodology set forth in a shareholder’s agreement does not apply to fixing the price of the minority shareholder’s stock interest where the sale being ordered because of minority oppression.  Hughes v. Sego Int’l. Ltd., 192 N.J. Super. 60, 69-70 (App. Div. 1983).  In Hughes, the Appellate Division revised a Trial Judge who utilized a formula contained in a shareholder’s agreement without first determining the “fair value” of the stock. Hughes, 192 N.J. Super. at 69-70; see, Hamilton, Johnson v. Johnson, 256 N.J. Super. 657, 672 (App. Div.), certif. den. 130 N.J. 595 (1992); see also, Torres v. Schripps, 342 N.J. Super. 419, 433-435 (App. Div. 2001). That is because N.J.S.A. 14A:12-7(8)(a) requires that the purchase price be “fair value” of the shares.  Hamilton, 256 N.J. Super. at 672.  Hence, if the Court finds minority oppression it will not apply the valuation formula contained in the shareholder’s agreement unless that formula resembles “fair value.”

Hence, mergers or consolidation can be used to eliminate minority shareholders. Fortunately, Courts have been willing to intervene to prevent fraudulent transactions. As discussed in previous blog postings, majority shareholders owe minority shareholders and the corporation certain fiduciary duties. Fortunately, New Jersey Courts have closely scrutinized mergers in which the majority shareholder’s conflict of interest produces benefits for the majority at the expense of the minority and the purpose of the merger was to get rid of the minority. Berkowitz v. Power/Mater Corp., 135 N.J. Super. 36 (Ch. Div. 1975); Outwater v. Public Service Corp. of New Jersey, 103 N.J. Eq. 461 (Ch. 1928), aff’d, 104 N.J. Eq. 490 (E & A 1929). The central factor Courts consider when determining whether or not to set aside a merger is: does the proposed merger have a valid business purpose?  If it does, it will probably be upheld. If the Court finds that the merger did not have a valid business purpose it is subject to being disallowed.

The issuance of new shares is frequently done to maintain control over the closely held company. Those in control may wish to issue the new shares in order to maintain control after the end of a voting trust; to head off creation of a new majority amongst the shareholders; or to obtain the necessary votes for approval of a fundamental corporate change such as a merger.

Sometimes shareholders in closely held companies hold certain “preemptive rights.”  A preemptive right gives each shareholder an option to subscribe to a new allotment of shares in proportion to their existing shares before new shares are offered. Typically, preemptive rights do not attach to nonvoting stock. At one time most states provided for preemptive rights, either as mandatory or the default rule. That has changed over the course of time. For example, in New Jersey, any corporation organized after January 1, 1969, does not have preemptive rights unless the certificate of incorporation provides otherwise. N.J.S.A. 14A:5-29. Any New Jersey corporation formed before January 1, 1969, may alter or abolish preemptive rights by amendment to its certification of incorporation. N.J.S.A. 14A:5-29. 

Even if preemptive rights are not provided, the specific issuance of additional shares as a means of oppressing the minority shareholder could be challenged by the assertion of litigation alleging breach of fiduciary duty. If a minority shareholder was to assert the same, the Court would ultimately have to decide whether or not the issuance of additional shares is within the sound discretion of the majority (i.e. the “business judgment rule”) or “self-dealing.”  See, Maul v. Kirkman, 270 N.J. Super. 596, 614 (App. Div. 1994) (the business judgment rule “is rebuttable presumption , and the burden shifts to the defendant to show the intrinsic fairness of the transaction in question upon the showing of ‘self-dealing’ or ‘other disabling factor’”).

Often, New Jersey Chancery Courts asked to adjudicate this issue will need to determine whether or not the majority shareholder issued the new shares in an effort to interfere with the reasonable expectations of the minority.  If the new shares are offered for grossly inadequate consideration; or the primary purpose of the issuance was to squeeze-out the minority, there is a greater chance that the Court could rule that the issuance of said shares was oppressive as opposed for a legitimate business purpose.  Of course, rarely does a defendant admit that they issued shares to themselves or those close to them for less than they are worth or to oppress the minority. As such, when I am asked to represent a minority shareholder confronted with this form of oppression it is important that I rely upon my along with the experiences of well-trained experts to present evidence to the Court which demonstrates that the issuance of new shares was to oppress rather than for a legitimate business purpose.

A number of remedies are available to rectify stealing. First, if the honest shareholder is seeking to purchase the stock of the dishonest shareholder the Court possesses the equitable powers to apply discounts. Those discounts could reduce the purchase price by 25% to 50%. Second, the injured shareholder may be awarded compensatory damages, attorneys’ fees and costs. Third, the law abiding shareholder’s expert could present opinion testimony as what the company may have been worth if the theft had not occurred. In other words, the expert could “normalize” the company’s financial records to reflect the true cash flow of the company. That, in turn could result in a higher valuation. Finally, if a party was able to prove stealing or fraud during the course of the litigation, the Court could remove the dishonest shareholder and appoint a receiver to manage the day to day affairs of the company. N.J.S.A. 14A:12-7(2), (3), (4), (5), (6) & (7).