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

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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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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The purpose of this blog entry is to provide a brief list of the squeeze-out techniques often used by majority shareholders in their effort to oppress minority shareholders. The list which follows is merely illustrates of some of the techniques I often encounter with regard to my representation of oppressed minority shareholders. Of course, this list is not exclusive. 
 

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.

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A minority shareholder can suffer catastrophic damages in a squeeze-out or oppressive situation.  In such a dilemma, the minority shareholder may be deprived of any effective voice in the making of business decisions. Moreover, they could be locked out of the company’s premises, lose their job and be denied access to important information. Without the aid of competent counsel the oppressed minority shareholder could find that their investment in the enterprise is at least temporarily worthless.
 

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.

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The March 24, 2008, edition of the New Jersey Lawyer reported that the New Jersey Attorney General is investigating whether or not it’s Division of Consumer Affairs should assert fraud or Consumer Fraud claims against JuicyCampus.com, a free website which allows individuals to post anonymous opinions to "often nonsensical and sometimes vicious discussions" about who’s the most overweight student on campus, or who on campus has the most morally casual attitude? This invites the following question: can the New Jersey Attorney General successfully assert claims against this website? Probably not.

The New Jersey Consumer Fraud Act.

New Jersey enjoys one of the strongest consumer protection statutes in the United States.  New Jersey Courts have consistently emphasized that like most remedial legislation, the New Jersey Consumer Fraud Act ("CFA") is to be construed liberally in favor of consumers. Although initially designed to combat "sharp practices and dealings" that victimized consumers by luring them into purchases through fraudulent or deceptive means, the Act is no longer aimed solely at "shifty, fast-talking and deceptive merchants" but reaches "non-soliciting artisans" as well. Thus, the Act is designed to protect the public even when a merchant acts in good faith. Despite the same, it appears that the CFA will not be a viable claim against the Juicy Campus website because it did not engage in activities which violate the CFA.

The CFA only recognizes three forms of violations.  They are: (1) misrepresentations of fact; (2) knowing omission of fact; and (3) per se violations of administrative code.  Cox v. Sears Roebuck & Co., 138 N.J. 2 (1994)The first apparently problem with the State’s possible case against the website is that most of the statements posted on the website appear to be "opinions" rather than "facts."  Opinions are generally not actionable under the CFA.  Moreover, in order for there to be a violation of the CFA, the State would need to prove that a consumer suffered an ascertainable loss which is has a casual connection to the misrepresentation, omission or per se violation of the act. In other words, the State would have to prove that the recipient of the false information suffered a loss as a result of reading those false statements.

FRAUD

In order to prove fraud, the State of New Jersey would have to prove by "clear and convincing evidence" that the defendant made a material misrepresentation of a presently existing material fact, with knowledge of its falsity and with the intention that the other party rely thereon, resulting in reliance in that party to its detriment. The first procedural hurdle the State would face if it were to assert a fraud claim is that it may not have standing to assert that claim because it did not suffer and damages.  Unlike the CFA which gives the Office of the New Jersey Attorney General powers to assert claims under that Act, N.J.S.A. 56:8-3, in order to have standing to assert a common law fraud claim the State would need to demonstrate that it was somehow damaged. Perhaps, if the website in question has false statements about State colleges or universities, the State would have standing to assert a fraud claim. Since it appears not to be the case, I believe that any common law fraud claim asserted by the State would be subject to dismissal for lack of standing.

Like a CFA claim, the State would have trouble asserting a fraud claim because it appears that the statements made on the website were opinions rather than knowingly false presently existing material facts. Again, under the CFA and fraud opinions are not actionable.  Thus, unless the website posted a knowingly false presently existing material fact such as "X State University admitted 25 students who’s grade point averages and SAT scores were 90% below the mean SAT and GPA requirements because those students had ties to Governor X," the State could not assert common law fraud claims.

Moreover, in prove fraud, the State would need to prove that the website posted those presently existing false statements with knowledge that they were false at the time they were placed. The first issue is that the website simply hosts the statements of others. The website is really not making any statements. It also appears that as a result of the same, it would be extremely difficult for the State to prove that the website knew that the factual statements were false at the time they were made.

Finally, as discussed above, it appears that the State would not be able to prove by clear and convincing evidence that it detrimentally relied on those false statements and suffered damages as a result of the same. In order to successfully prosecute a fraud claim, the Plaintiff must prove amongst other things that it detrimentally relied upon the false statements and suffered damages as a result. A classic example of a party detrimentally relying and suffering damages is "Seller provides knowingly false income statements to a potential buyer, the buyer in doing its due diligence relies on the knowingly false income statements and purchases the company. After the purchase, the buyer learns that the pro-offered income statements were inflated and the company was not worth anywhere near what it paid for the company." In the aforementioned example, the buyer detrimentally relied on the false income statements and suffered damages as a result. It seems unlikely that the State of New Jersey detrimentally relied upon what was posted on the website in question and suffered damages as a result.

For the reasons stated above, the New Jersey Attorney General may want to consider not asserting charges against JuicyCampus.com.

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 The Honorable Gerald C. Escala of the Superior Court of New Jersey, Chancery Division, Bergan County issued an interesting decision which provides additional guidance on the legal issue of minority oppression along with the calculation of “fair value” of the minority owners stock. In Venturini v. Steve’s Steak House, 2006 WL 445059, two nephews who collectively owned fifty percent of Steve’s Steak House filed a complaint against their aunt, Marie Damiani (“aunt” or “Marie”) alleging that they were oppressed minority shareholders.

The nephews, Steve Venturini, III (“Steve III”) and Gregg Venturini (“Gregg”) collectively obtained fifty percent ownership in the corporation when their father, Steve Venturini, II, died in or about 2001. Around the time of their father’s death, Marie offered to purchase Steve III and Gregg’s interest in Steve’s Steak House, Inc. (“the corporation” or “Steve’s Steak House”). Growing up, Steve III and Gregg rarely worked for the corporation. On occasion they would open up or close the restaurant of perform odd jobs for the corporation. Despite the same, for a significant period of time, even after the litigation was commenced by them in the Superior Court of New Jersey, Chancery Division, Bergan County, they received approximately $750.00, per week from the corporation. Marie and her child, Blaise were full time employees of the corporation for a majority of their lives.

 

Moreover, the court found that Gregg had several physical altercations with his cousin, Blaise. During the course of one altercation, Gregg threatened and did return with his firearm. The local police were called and Gregg was eventually ordered to surrender all of this firearms.

 

Eventually, Marie terminated Gregg’s and Steve III’s employment and “locked them out” of the business property. As a result of those actions, Gregg and Steve III, commenced this case. In their complaint they sought an accounting, dissolution of the corporation, damages, fees, and costs, and “any and all further relief that this court deems equitable and just.”

 

The first issue the Venturini Court needed to address was whether or not Gregg and Steve III, were oppressed minority shareholders. The Court held they were not. The Court found that Gregg and Steve, III, were not actively involved in the corporation. As stated above, they were not regularly employed by the corporation. The Court found that their involvement was “passive” and held that “equity does not aid one whose indifference contributes materially to the” complained of injuries. Harrington v. Heder, 109 N.J. Eq. 528, 534 (E & A 1934). Moreover, the Court found that “mere disagreement or discord between the shareholders is not sufficient to prove a violation of the [minority oppression] statute.” Citing, Brenner v. Berkowitz, 134 N.J. 488, 505 (1993).

 

The second issue the Court had to address was whether or not the corporation should be dissolved. It found that Steve’s Steakhouse should not be dissolved. The Court in making that determination followed well-established precedents which state that dissolution “is not appropriate” where the corporation is a viable entitle. Steve’s Steakhouse was a thriving business. To dissolve it would be inequitable and contrary to the law and public policy. The Court found that the appropriate remedy in this case was the Court Ordered sale of Steve III’s and Gregg’s stock because it found that “there has been an irretrievable breakdown in the relationship of the shareholders.” Citing, Musto v. Vidas, 281 N.J. Super. 548 (App. Div. 1995); Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474 (1974); see also N.J.S.A. 14A:12-7(8).   The Venturini Court found despite the fact that it did not find that Steve III and Gregg were oppressed, courts of equity have the power “to mandate the buyout.” Citing, N.J.S.A. 14A:12-7. As a result of the same, it considered the testimony of various expert witnesses, so that it could opine as to the “fair value” of Steve III’s and Gregg’s interest in Steve’s Steakhouse.

 

With regard to the valuation, the Court followed well-established legal precedent and decided that the date of valuation should be the date Steve III and Gregg filed their complaint. In order to determine the fair value of the corporation, the Court considered the valuation of two experts for each side who were charged with providing an opinions of the fair value of the earnings of the corporation along with its principal asset, the building which housed the restaurant.

 

Finally, the Court decided not to award pre-judgment interest and counsel fees to Steve III or Gregg. The reason it refused to award pre-judgment interest is because it found that the $750 a week pay the brothers received both pre- and during the pendency of the litigation was probably far more than they should have received because they did not provide services for the corporation. Moreover, the Court decided not to award counsel fees to either party because it opined that neither side truly prevailed.

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In most cases, the single most important issue in a minority shareholder oppression dispute is the valuation of the complaining shareholder’s interest in subject closely held company. One important sub-issue is the applicability of marketability and minority discounts in valuing a less than controlling interest in the subject closely held corporation.

Before considering whether or not these discounts are applicable, a general understanding of the marketability and minority discounts and the rationale behind them is important. Generally, a minority discount is an adjustment which could be applied based upon the minority shareholder’s lack of control over the closely held business entity. The theory behind the minority shareholder discount is that non-controlling shares of non-publicly traded stock are not worth their proportionate share of the firm’s value because the minority owner lacks voting power to control the corporation’s actions.  The marketability discounts adjusts for a lack of liquidity in one’s interest in an entity, on the theory that there is a limited supply of potential buyers of the stock of a closely held corporation.

The general rule in New Jersey is that in a statutory appraisal for purposes of determining the “fair value” of shareholders owned by a dissenting shareholder, N.J.S.A. 14A:11-1 to -11, or for valuing shares in a court-ordered buy-out resulting from an oppressed shareholder situation, N.J.S.A. 14A:12-7(1)(c), neither a marketability nor a minority discount should be applied absent extraordinary circumstances.  Balsamides v. Protameen Chemicals, Inc., 160 N.J. 352 (1999); Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 383 (1999).  In other words, marketability and minority discounts generally are not applied in New Jersey valuation proceedings where there will be no actual transfer of shares and a sale of the entire business appears unlikely. Denike v. Cupo, 394 N.J. Super. 357, 383 (App. Div. 2007) (citing, Brown v. Brown, 348 N.J. Super. 466, 489 (App. Div. 2002)).

Although, the general rule sets forth that these discounts should not be applied the New Jersey Supreme Court has held that where “extraordinary circumstances” exist the application of the marketability and minority discounts maybe warranted.   For example, in Balsamides the New Jersey Supreme Court found that a 35% marketability discount was appropriate because the oppressing 50% shareholder who was to acquire the shares of the oppressed 50% shareholder. The Balsamides Court found that equity demanded that the oppressor not be rewarded for his conduct by allowing a buy out at a discounted price.  Hence, these discounts maybe applied where equity dictates. 

It is extremely important that all parties involved in minority oppression litigation consider whether or not “extraordinary circumstances” warrant their application. Moreover, it is extremely important for the advocates to either prove or disprove that there are extraordinary circumstances present that warrant the application of the marketability and/or minority discounts. It is important to consider these principals throughout the litigation. Whether or not these discounts apply will have a huge impact on the ultimate resolution of this complicated form of litigation.

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This week's New Jersey Legal Update podcast is a follow-up to a previous podcast on minority oppression discussing who can file a minority oppression lawsuit, and what one can expect if they do. This podcast will follow up with a discussion of one of the most important parts in a minority oppression lawsuit - valuation

This week's New Jersey Legal Update podcast is presented by Scott Unger, Shareholder of Stark & Stark's Litigation Group.

You can download the New Jersey Legal Update Podcast # 66 here. (5.9 MB)

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This week's New Jersey Legal Update podcast will discuss the case In re Lead Paint Litigation, which is currently before the New Jersey Supreme Court. This podcast will give a brief discussion on the background, facts, and parties of the case, an overview of the procedural events that have occurred, as well as a discussion on the impact this decision could have throughout the state of New Jersey.

This week's New Jersey Legal Update is presented by Scott Unger, member of Stark & Stark’s Litigation Group.

You can download the New Jersey Legal Update here. (5.4 MB)

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