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 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.

• All documents presented to the employer during the verification process must be unexpired. Previously, it was not uncommon for an employer to accept certain expired document such as a United States passport.
• List A identity and employment authorization documentation will no longer include Temporary Resident Card (Form I-688), Employee Authorization Card (Form I-688A) and Employment Authorization Card (Form I-688B), as these cards are now obsolete.
• List A will now include foreign passports containing certain immigrant visas that are machine readable and passports from the Federated States of Micronesia or the Republic of the Marshall Islands if presented with an I-94 or I-94A arrival/departure record.

The new I-9 form will be available at www.uscis.gov/files/form/I-9.pdf beginning on February 2, 2009 April 3, 2009. The new form should only be completed for new hires and for reverification of certain employees with temporary work authorization; it should not be completed for existing employees.

What is “Deferred Compensation” Under 409A?
What is so striking about Section 409A, it its application to almost every type of plan or arrangement in which compensation is paid in a year subsequent to the year in which the services were performed by the service provider (i.e. the executive). Compensation is deferred when the service provider first has a legally binding right to the payment of compensation. Because the definition of deferred compensation is so broadly defined in Section 409A, it not only encompasses traditional nonqualified deferred compensation plans (i.e. where the executive elects to defer salary or bonuses), but also to payments under employment agreements, severance agreements and other similar arrangements. Tax-qualified plans such as 401(k) plans and IRAs are exempt from Section 409A. Also exempt from Section 409A are bona fide vacation, sick leave, disability pay and death benefit plans.

 

Section 409A Requirements
Section 409A specifically addresses when a service provider may make an election to defer payments under a deferred compensation plan or arrangement, when compensation under a deferred compensation plan or arrangement may be distributed, and how a service provider may delay the receipt of payments under a deferred compensation plan or arrangement.

Each deferred compensation plan or arrangement (including employment agreements, severance agreements and other similar arrangements) must be in writing and fully compliant with Section 409A by January 1, 2009.

 

What Happens if the Section 409A Requirements are Not Met?
Failure to comply with Section 409A will have severe consequences to the service provider. Those consequences include i) immediate taxation of all amounts deferred under the plan or arrangement; ii) assessment of an interest penalty for the underpayment of taxes during the deferral period; and iii) an additional 20 percent penalty tax.   In addition, the service recipient (employer) will have additional tax reporting requirements under Section 409A.
 

Immediate Action is Necessary
 

All documents, plans, arrangements or contracts that may defer compensation must be reviewed immediately. Among these documents are:

• Deferred compensation plans and/or agreements
• Employment agreements
• Severance plans and/or agreements
• Change in control agreements
• Stock appreciation rights agreements
• Expense reimbursement policies

 
Stark & Stark can assist you in reviewing and amending your deferred compensation plans and arrangements and will work to ensure that all documents are compliant with Section 409A by January 1, 2009. We can also assist you with new plans and arrangements that will be Section 409A compliant when drafted.